Prediction Markets: The Next Major Financial Infrastructure Layer, Driven by Institutional Adoption and Regulatory Alignment

Prediction markets are no longer niche experiments-they're emerging as a critical layer of financial infrastructure, driven by institutional adoption and regulatory alignment. What once seemed like a playground for retail traders and academic curiosity is now attracting billions in capital, reshaping how markets aggregate information, and offering new tools for hedging geopolitical and macroeconomic risks.

Institutional Adoption: From Skepticism to Strategic Investment

Institutional interest in prediction markets has surged over the past two years. According to a report by Acuiti, nearly half of global proprietary trading firms are evaluating these markets, with 10% already actively trading and 35% planning to enter within three to five years. In the U.S., the trend is even more pronounced: over 75% of firms are either trading or evaluating prediction markets. This shift is being led by ultra-low latency and algorithmic trading firms, which see prediction markets as a high-liquidity, event-driven asset class.

The appeal lies in their unique structure.

Prediction markets allow participants to trade contracts based on the outcomes of future events-ranging from economic indicators to political developments. For institutions, this offers a way to hedge against uncertainty or profit from information asymmetry. However, challenges remain. As Will Mitting of Acuiti notes, modeling outcomes for events like "the likely date of Taylor Swift's wedding" requires novel risk management frameworks. Firms must also navigate issues like capital movement, wide spreads, and the need for robust back-office infrastructure as reported in industry analysis.

Despite these hurdles, 40% of surveyed firms expect prediction markets to become a "meaningful part" of institutional trading within three to five years. This optimism is justified by the markets' growing liquidity. Platforms like Polymarket and Kalshi now see weekly trading volumes exceeding $2.5 billion and $1.5 billion, respectively.

Regulatory Alignment: From Legal Uncertainty to Structured Frameworks

Regulatory clarity has been a game-changer. In 2025, the U.S. Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) have taken steps to define the boundaries of prediction markets. The CFTC's roundtable in 2025 highlighted the need for guardrails to manage risks like manipulation and market distortion. Meanwhile, KalshiEX LLC's 2024 legal victory-affirming its status as a federally regulated derivatives exchange-set a precedent for legitimacy.

Collaboration between regulators has also accelerated. The CFTC and SEC have harmonized approaches to digital assets, streamlining approvals for spot crypto products and fostering interagency cooperation. This alignment has reduced ambiguity for institutional investors, enabling platforms like Robinhood to partner with Kalshi to offer event contracts to retail and institutional clients.

Yet challenges persist. CFTC Commissioner Kristin Johnson has warned that prediction markets still lack sufficient regulatory boundaries, emphasizing the need for "greater visibility" into market activity. For now, platforms like Polymarket and Kalshi operate under a hybrid model of self-regulation and federal oversight, balancing innovation with compliance.

Financial Viability: A New Paradigm for Returns and Risk Management

Prediction markets are proving their financial viability. Their binary structure-where contracts pay out based on the occurrence of a specific event-makes them accessible even to traditional investors. For example, Kalshi's market share has grown to nearly 60% of the sector, driven by its regulatory clarity and institutional-grade infrastructure.

Institutional investors are increasingly viewing prediction markets as a tool for diversification. A 2025 institutional outlook report notes that investors are shifting toward portfolios with 60% stocks, 20% bonds, and 20% alternatives-a model that could incorporate prediction markets as a hedge against macroeconomic shocks. These markets also offer real-time insights into public sentiment, often outperforming traditional polling or expert analysis.

While specific case studies on institutional returns remain scarce, the broader trend is clear: prediction markets are becoming a strategic asset class. Firms that master their unique risks-such as modeling event probabilities and managing liquidity-stand to gain significant alpha.

The Road Ahead: Prediction Markets as Financial Infrastructure

Prediction markets are no longer speculative-they're a foundational layer of financial infrastructure. Their ability to aggregate information, price uncertainty, and democratize access to event-based trading is reshaping how markets function. As regulatory frameworks mature and institutional infrastructure scales, these markets will likely play a pivotal role in the next decade of finance.

For investors and institutions, the question isn't whether prediction markets will grow-it's how quickly they'll integrate into mainstream portfolios. The next major financial innovation may not be a new asset class, but a new way of predicting the future.