Market Design and Defensibility
As prediction markets continue to expand across financial, sports and event-driven use cases, one question is becoming increasingly urgent: how do operators design products that can scale responsibly in regulated markets? From contract structure and settlement mechanics to insider participation and manipulation risk, the challenge is no longer simply bringing new products to market, but ensuring those products can withstand regulatory, legal and operational scrutiny.
At FORWARD, that theme carried into a panel focused on market design, featuring:
- Liz Davis, Partner, Davis Wright Tremaine
- Carl Kennedy, Partner, Katten
- Joe Schifano, moderator, Global Head of Regulatory Affairs, Eventus
Rather than discussing these issues in the abstract, Schifano walked the panelists through a series of realistic listing scenarios – from contracts tied to public companies and executive decisions to sports outcomes and geopolitical events.
Regulatory Risk Starts at Product Design
One of the first hypothetical scenarios Schifano raised involved contracts tied to publicly traded companies, sparking immediate jurisdictional questions. The panelists discussed whether certain event contracts could fall within the remit of the CFTC, the SEC or both.
One theme that emerged was the need for a more disciplined approach to product development. Rather than treating compliance as a downstream consideration, the panel emphasized the importance of embedding defensibility into the design process itself.
Kennedy noted that these questions arise well before a product is listed.
“Any time you reference an event contract that references a publicly traded company, I think one of the immediate risks that come to mind are the regulatory risks – have you characterized that instrument as a swap that’s regulated by the CFTC, or are we talking about an instrument that could be regulated by the SEC?” Kennedy said.
While many prediction market products fall under CFTC oversight, contracts tied to corporate actions or securities-related outcomes may introduce SEC considerations as well. That overlap introduces complexity, particularly given the current lack of explicit guidance.
Davis said exchanges should assume both regulators are watching closely.
“We’re in a gray area right now. The SEC hasn’t fully articulated its position on prediction markets, but they are clearly paying attention. This is one of the areas of harmonization between the SEC and the CFTC, so as a CCO, you want to keep apprised of those developments,” she said.
For compliance teams, that means product design cannot happen in a vacuum. Legal analysis, documentation and regulatory awareness must be embedded from the outset.
Single-Actor Contracts Face a Higher Standard
The discussion then moved into contracts tied to the actions of a single individual, such as a CEO announcement or athlete performance. These contract types introduce a more direct link between behavior and outcome, making them inherently more complex to justify.
One of the core challenges exchanges face is the need to demonstrate that a contract is not readily susceptible to manipulation under CFTC Core Principle 3. Kennedy pointed to recent CFTC guidance as a clear signal that the Commission is paying close attention to these products.
“I read the advisory as a declarative statement to exchanges that, look, we’re paying attention to this. How are you demonstrating in your product specs, in your analysis, that you’re making sure that these contracts aren’t easily manipulated by the single actor in that instance? How can you demonstrate that? I think that’s a very high standard,” he stated.
The panelists agreed that as demand grows, exchanges face a higher burden to justify why contracts tied to the actions of a single individual should be listed at all. Firms may need to show how they assessed insider participation, data reliability, settlement logic and the broader incentives that could create manipulation risk.
Political Contracts Raise Questions About Insider Participation
The panel also addressed contracts tied to political candidates and election outcomes. Schifano raised scenarios involving contracts on whether a candidate will win, perform well, remain in a race or withdraw, as well as the possibility that a candidate or campaign could cite market prices in media appearances or fundraising materials.
For the panelists, these scenarios shifted the focus from contract design alone to the strength of pre-trade controls.
“I think it’s less of a question of the contract design, but more of your pre-trade controls and restricting those who might be able to influence the outcome or the price of a particular contract,” Davis said.
Kennedy agreed, pointing to the importance of tight policies, procedures, enhanced KYC and onboarding processes that can help demonstrate the exchange acted properly.
The discussion proved especially timely. Just days later, the U.S. Senate unanimously passed a resolution barring senators and staff from participating in prediction markets, underscoring the growing public-policy concern around political insiders trading on markets where they may have privileged information or direct influence over the outcome.
Designing for Future Scrutiny
A recurring theme throughout the panel was that exchanges should design products not only for initial launch, but for future scrutiny. In practice, this requires not only thoughtful contract design, but also clear documentation around how manipulation risk has been assessed and mitigated.
“The issue is that hindsight is 20/20. You don’t want enforcement coming back after the fact and questioning everything you did. You need to be documenting everything – your analysis, your decision-making, your assumptions – because that’s what regulators will look at a year from now,” Davis stated.
She went on to note that documentation should extend beyond legal memos. Firms should be prepared to show how they evaluated data sources, engaged with relevant governing bodies, reviewed settlement permutations and built safeguards around contract integrity.
Kennedy pointed back to the recent CFTC guidance: “If you really want to make sure that these are future-proof…one of the statements made in the CFTC advisory was, if you have questions about these contracts – if you’re worried that they may fail to meet the core principle – talk to us before you list it,” he stated.
The takeaway was clear: product innovation may move quickly, but regulatory scrutiny moves with a long memory. As prediction markets continue to evolve, the firms that succeed will be those that treat design, documentation and governance as core components of their product strategy.
“The real differentiator is going to be who can demonstrate they acted responsibly, consistently and with a defensible process when these decisions are reviewed later,” stated Schifano.