A New Animal: How Prediction Markets Push Sportsbooks to Choose Between Wall Street and Vegas

How We Got Here

New York’s clash with Kalshi, the rise of Polymarket and mounting fears over insider trading and market manipulation have turned prediction markets into both a commercial opportunity and a reputational hazard for any operator tempted to follow their lead.

At the same time, the largest U.S. sportsbooks are no longer passive observers. As explored in iGaming Review’s earlier coverage, FanDuel has taken a narrower path, launching its FanDuel Predicts app with sports and financial event contracts in just five non‑sportsbook states as part of a phased rollout, while DraftKings has moved more aggressively with a standalone DraftKings Predictions app live in 38 states, offering sports and macro contracts via multiple CFTC‑regulated exchanges.

The divergence underscores the central question this article examines: if prediction markets are going to sit inside, alongside, or in competition with traditional sportsbooks, whose rules apply – and what does that mean for brand trust in 2026?

This article the, therefore, shifts the series’ focus from commercial strategy to regulation, risk, market structure. It looks first at New York versus Kalshi as the clearest legal test yet of whether sports‑style event contracts are derivatives or bets, then at the pressure prediction markets are putting on statehouses, and finally at the insider‑trading and integrity concerns that could redefine how operators think about brand safety in this emerging vertical.

A new animal: New York versus Kalshi

On 24 October 2025, the New York State Gaming Commission sent Kalshi a cease‑and‑desist letter, accusing it of “illegally operating” an unlicensed mobile sports‑wagering platform in connection with sports events in the state.

Kalshi sued three days later, filing in federal court on 27 October 2025 to argue that, as a CFTC‑regulated event‑contract exchange, it falls under federal derivatives law rather than New York’s gambling code.

New York has since agreed not to enforce the order while the court considers Kalshi’s request for an injunction, a process that is likely to keep the dispute alive well into 2026.

For New York lawmakers, the Kalshi case is less a one‑off dispute than a sign that existing categories are struggling to keep up.

Assemblymember Clyde Vanel has introduced legislation that would ban trading on many types of predictions, including sports and politics, explicitly linking event‑contract markets to the integrity risks already familiar from match‑fixing and disciplinary scandals in leagues such as the NBA and MLB, and warning that similar dynamics in politics or public policy could have even more far‑reaching consequences.

Whatever the outcome, the jurisdictional stakes extend well beyond one company. If New York’s position is upheld, other states may feel emboldened to treat sports‑style event contracts as unlicensed betting and move against them; if Kalshi prevails, the ruling will strengthen the argument that federal derivatives law, not state gaming statutes, should define the perimeter for prediction markets.

In either scenario, the industry will be looking at a more hard‑edged map of who is in charge.

Statehouses under pressure

New York is the most visible flashpoint, but it is not the only arena where prediction markets are pressing on the edges of sports‑betting law. Across the country, state legislators who thought they had drawn a reasonably clean line around sports betting are discovering that a parallel universe of event‑contract platforms can give users bet‑like exposure without a state sportsbook licence. Those operators now feature in the same hearings as daily fantasy and pick’em providers, complicating already fraught debates over what counts as skill, what counts as chance and what deserves to be taxed.

That tension is set to intensify. Lobbyist Jeremy Kudon has warned that “Kalshi and Polymarket are going to advertise significantly … that is going to be a driving factor for legislators to push these bills forward, just so they can capture the tax revenue.” As “trade the game”‑style ads start appearing in the same breaks as sportsbook spots, lawmakers will have to decide not only whether these products are permitted, but also whether they should be taxed like state‑licensed sports betting or treated as federally regulated financial contracts that sit outside the sports‑wagering tax base.

The traditional alignment of industry voices is also shifting. Major operators such as DraftKings and FanDuel have chosen to leave the American Gaming Association after disagreements over how aggressively the industry should embrace prediction products, and now push their interests through the Sports Betting Alliance alongside other leading sportsbooks.

For state‑level politicians, that fracture makes the picture more complex: when the biggest licensed operators cannot agree on whether prediction markets are a threat, a complement, or a future pillar of their businesses, it becomes harder to rely on industry consensus as a guide to policy.

Polymarket interface showing politically sensitive markets, including “Trump won, now what?” and campaign‑promise contracts, illustrating how prediction platforms turn real‑world political events into tradable instruments. Image credit: Alamy/IMAGO/BODE

Insider‑Trading Fears

If the jurisdictional fight over who regulates prediction markets is one source of unease, a second is the spectre of insider trading and market manipulation. CBS News New York describes how an anonymous Polymarket trader staked about 32,000 dollars on the downfall of Venezuelan leader Nicolás Maduro just hours before President Trump announced he had been captured by U.S. forces, turning that position into more than 400,000 dollars – a sequence that “reeked of insider trading,” according to financial‑trading experts quoted in the report. For regulators and compliance officers, the episode raises an obvious question: how many similar trades, particularly in thin markets on politics or national security, never attract public scrutiny?

Platforms are not blind to those concerns. Kalshi insists that it “explicitly prohibits insider trading of any form,” stressing that “market integrity is integral to the functioning of any US-regulated exchange,” and says it bars government employees from trading on government‑related markets.

Yet compliance specialists such as KPMG’s D.J. Hennes point out that using material non‑public information is already illegal and prosecutable as fraud; the problem is less a gap in statute than the challenge of enforcing existing rules in a new asset class where surveillance tools and case law are still immature.

There is also a more mundane, but no less damaging, version of the integrity issue: the fine print of contract definitions.
When Time magazine named the “Architects of AI” as its 2025 Person of the Year, traders who had bet on “AI” as the likely choice were surprised to see their positions settled at zero because the contract language did not track the editorial decision closely enough. Episodes like that may not involve bad faith, but they underscore that event contracts are legal documents as much as they are market tickers – and that users who treat them like simple bets can find themselves on the wrong side of a technicality.

Brand trust meets a messy product

For operators and suppliers watching from the sidelines, prediction markets have moved from theory to practice in a way that directly touches on brand, regulation and integrity. Recent industry outlooks argue that a central trend in igaming for 2026 will be a shift away from pure bonus competition toward reputation, safety and “safer play” positioning, making trust a primary battleground for leading brands. That creates both opportunity and tension for any sportsbook considering a prediction‑market product or a partnership with a specialist exchange.

The commercial appeal is straightforward. Platforms such as Kalshi and Polymarket have shown they can attract highly engaged, financially literate users and generate billions of dollars in annual volume, with sports and macro‑economic events emerging as major drivers. The concept of trading event contracts in real time also complements in‑play betting and fits neatly alongside existing app experiences.

At the same time, early rollouts have exposed gaps and unresolved questions. Several high‑profile prediction apps have launched with a slimmer set of responsible‑play tools and softer gambling language than their regulated sportsbooks, drawing criticism from safer‑gambling advocates and prompting some operators to retrofit hotlines and disclosures. Regulators in states such as New York have challenged whether certain contracts should be treated as federally regulated derivatives or as state‑licensed wagering, and ongoing lawsuits are testing how far state commissions can go in restricting event markets.

For Tier‑1 operators, that means brand and regulatory risk sit alongside the product upside. Partnering with or building prediction markets can align a sportsbook with innovative, “Wall Street‑style” trading, but it also exposes the brand to politically sensitive markets, disputes over settlements and potential insider‑trading or manipulation cases at a time when regulators are signalling greater scrutiny. How those issues are resolved—in courts, in rule‑making and in the court of public opinion—will go a long way toward determining whether prediction markets evolve into a mainstream complement to sportsbooks or remain a niche, higher‑risk side bet on the future.

Scattered chess pieces around a lone king capture the unresolved “regulatory endgame” for prediction markets – whether they will ultimately be governed as derivatives, as gambling, or under a new hybrid regime.

Three unanswered questions

Behind the specific controversies, at least three bigger unknowns still hang over the entire prediction‑market vertical.

The first is the regulatory endgame. It remains unclear whether platforms such as Kalshi and Polymarket will ultimately be treated primarily as CFTC‑regulated derivatives venues, as gambling products overseen by state gaming commissions, or as some hybrid that blends elements of both. How disputes like New York’s cease‑and‑desist order against Kalshi are resolved will shape whether other states follow New York’s lead, look to Nevada‑style guidance that treats many event contracts as wagering, or defer more explicitly to federal oversight.

The second unknown is the true scope of insider‑trading and manipulation risk. The recent Maduro trade on Polymarket, in which an anonymous user made hundreds of thousands of dollars by taking a large position shortly before news broke, has become a high‑profile example and has sparked criticism that prediction markets can reward access to privileged information. Platforms have rulebooks that ban insider trading and argue they can monitor and police abuse, but regulators and lawmakers are still deciding whether to treat these cases with the same seriousness as comparable behaviour in equities and options.

The third question concerns the impact on traditional sportsbooks and their brands. Analysts and operators disagree on whether prediction markets will cannibalise existing sportsbook handle by attracting sophisticated bettors away from traditional markets, or instead expand the overall pie by bringing in “Wall Street‑style” users who would not otherwise bet on sports. At the same time, major trade groups such as the American Gaming Association and the Indian Gaming Association are urging Congress to rein in sports‑related event contracts, while some large operators are exploring building or partnering on prediction products, underscoring that there is no settled industry view on how far to go down this road.
What is clear is that the answers to those questions will help shape the economics and product roadmaps of serious players in U.S. sports betting, from consumer‑facing brands to B2B providers deciding whether to power, partner with, or help supervise prediction markets. As New York and other states test their authority, as Kalshi, Polymarket and new entrants ramp up marketing, and as policymakers weigh insider‑trading and integrity fears against arguments for more efficient information markets, the line between trading and betting is being renegotiated in real time.

That makes prediction markets less a simple feature add‑on and more a live test of how far the industry is prepared to stretch its regulatory frameworks and brand promises in pursuit of the next wave of growth.

Further Reading