WHAT ARE THE ODDS? THE HISTORY, LEGALITY, AND UTILITY OF POLITICAL BETTING 

INTRODUCTION

In October 2024, a federal appeals court delivered a landmark decision in American financial history, rejecting the Commodity Futures Trading Commission’s (CFTC) emergency request to halt Kalshi’s political betting markets. The court’s ruling, which emphasized the CFTC’s failure to demonstrate concrete threats to election integrity, marked the first time a fully regulated exchange could offer substantial political event contracts in the United States. Within days, Kalshi had listed dozens of contracts on congressional control and presidential outcomes, allowing regulated wagers of up to $100 million—a dramatic departure from the small-stakes world of academic prediction markets and offshore betting sites such as Polymarket.

This contemporary development represents the latest chapter in the complex relationship between American democracy and political betting markets. From 19th-century Wall Street corners where presidential election odds were freely traded to the modern era of digital prediction platforms, these markets have persistently emerged as tools for aggregating public knowledge about electoral outcomes. Proponents argue that these markets harness the wisdom of crowds to produce more accurate forecasts than traditional polling methods, while critics warn of the dangers of “commodifying democracy” and enabling the possibility of market manipulation.

This article reviews the evolution, efficiency, and legal status of political betting markets in the United States. Through review of historical precedent, research on market accuracy, and current regulatory frameworks, it argues that carefully regulated political prediction markets serve valuable social functions while addressing legitimate concerns about electoral integrity and market manipulation. The Kalshi experiment provides an unprecedented opportunity to test these propositions in a regulated environment with meaningful stake sizes and well-informed participants. To understand the significance of Kalshi’s breakthrough and its implications for modern financial markets, we must first examine the historical precedent of political betting in democratic societies. This history reveals both the persistent appeal of such markets and the recurring concerns they have generated.

I. HISTORY

The practice of betting on political outcomes extends back centuries, challenging the common perception that political prediction markets are a modern phenomenon. Historical records reveal sophisticated betting activities across multiple societies, with particularly well-documented examples spanning from Renaissance Italy to 20th-century America. Drawing primarily from the work of Paul Rhode and Koleman Strumpf, this section of the article traces the evolution of these markets across multiple centuries and regions of the world.

The Italian Renaissance saw the first systematic development of political betting markets, which emerged within two distinct political traditions: secular electoral processes in city-states like Venice and Genoa, and papal succession in Rome. The Venetian system proved particularly sophisticated, integrating gambling with existing electoral mechanisms that combined voting and randomization. Meanwhile, papal election betting grew so prevalent that by 1503, odds-makers were already treating it as an established practice, suggesting even earlier origins.

While papal election betting eventually faced ecclesiastical prohibition, electoral betting found particularly fertile ground in Britain’s emerging financial centers during the Georgian era. The practice flourished within London’s network of gentlemen’s clubs and coffee houses, where political wagering became deeply intertwined with the period’s broader gambling culture. By the Victorian era, this informal betting had evolved into more structured markets, with the London Stock Exchange emerging as a central venue for electoral wagering.

As British political betting practices matured, similar markets were taking root across the Atlantic. Election betting emerged as a common feature of American political culture in the early national period. During the country’s first contested presidential election in 1796, public betting was already sufficiently established that William Cooper of Cooperstown found his supporters backing his congressional candidates with wagers. By the Jacksonian era, election betting had become deeply intertwined with the partisan political culture of torch-lit parades, hard cider, and intense newspaper coverage.

However, the practice generated significant controversy regarding election interference, prefiguring a key component of the contemporary debate over political betting markets. In 1840, supporters of Van Buren charged that “British gold” was being invested in “bragging bets” to help Harrison. The Whigs later protested that gamblers favoring Polk had committed voting fraud using election bet winnings to defray their expenses.

Following the Civil War, election betting became increasingly concentrated in organized markets in New York City’s financial district. The Wall Street election betting market reached its zenith in the early 20th century. During presidential contests between 1900 and 1916, trading on electoral outcomes would at times exceed stock and bond volume on the Curb Exchange. In the 1916 election, total betting reached $291 million in 2025 dollars, and betting activity during the campaign was widely reported in major newspapers, which treated the odds as key indicators of electoral prospects.

The organized election betting markets of Wall Street effectively ended in 1944, though smaller-scale informal wagering persisted. The markets’ decline, Rhode and Strumpf argue, stemmed from several converging forces: The emergence of scientific polling provided newspapers and the public with a robust, morally uncontroversial source of electoral forecasts; several key participants in the betting markets, such as John Doyle and Sam Boston, exited during this period; legal and regulatory pressures increased, including New York Mayor La Guardia’s intensive crackdown on gambling; market participants faced multiple economic constraints, such as high wartime taxes; and the legalization of horse race betting in New York in 1939, allowing several betting opportunities per day, appears to have diverted gambling activity. The combination of these factors effectively ended the era of organized election betting markets that had begun nearly a century earlier.

After a nearly fifty-year hiatus, organized political betting markets re-emerged in the late 20th century, though in markedly different forms than their predecessors. In 1988, the Iowa Electronic Market (IEM), operated by the University of Iowa as a teaching and research tool, became the first modern political futures market in the United States. The advent of internet technology in the late 1990s and early 2000s sparked a broader revival. Platforms like Intrade and Betfair emerged, allowing thousands of traders to place millions in wagers on electoral outcomes. However, regulatory uncertainty kept most of this activity offshore. The legal environment shifted dramatically in October 2024, when Kalshi, operating as a CFTC-regulated financial exchange, won approval to offer the first fully regulated election contracts in the U.S. since the 1940s. Within days, Kalshi had listed dozens of contracts on congressional control and presidential outcomes, allowing regulated wagers of up to $100 million—a scale reminiscent of the early 20th-century Wall Street markets.

The historical evolution of political betting markets in America sets crucial context for understanding their modern legal status. The same concerns about market manipulation and electoral integrity that led to their decline in the 1940s would later shape the regulatory framework that Kalshi would have to navigate.

II. LEGALITY

The legal status of political betting markets hinges on a complex interplay between statutory authority, agency rulemaking, and judicial interpretation. At the center of this dynamic is Section 5c(c)(5)(C) of the Commodity Exchange Act (CEA). The CEA was added by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, a comprehensive piece of legislation enacted in response to the 2008 financial crisis that dramatically expanded federal oversight of financial markets. Section 5c(c)(5)(C) provides the CTFC certain powers in striking down “event contracts,” derivative contracts for which the payoff is based on the occurrence, extent of occurrence, or contingency of a specified event. The CFTC was granted the authority to prohibit event contracts if they meet two conditions. First, the contracts must “involve” one of the following five specifically enumerated categories: terrorist acts, assassination attempts, war-related events, gaming activities, and activities that are unlawful under federal or state law. Second, the Commission must definitively demonstrate that such contracts are “contrary to the public interest.” Like many Dodd-Frank provisions, this section aimed to enhance regulatory oversight of novel financial products by giving the CFTC explicit authority to prohibit certain types of contracts deemed harmful to market integrity or the broader public good.

The CFTC exercised its authority under CEA Section 5c(c)(5)(C) by adopting Rule 40.11 in 2011 as part of broader changes to its regulatory framework. Under Rule 40.11, any exchange registered with the CFTC as a designated contract market (“DCM”) is prohibited from listing or accepting for clearing any contract that “involves, relates to, or references” the previously enumerated activities. The practical effect is that before an exchange can list a new event contract for trading, it must either self-certify to the CFTC that the contract complies with Rule 40.11 (meaning it does not involve prohibited activities) or obtain explicit CFTC approval. If the CFTC believes a self-certified contract may violate Rule 40.11, it can initiate a 90-day review period during which the exchange cannot list the contract for trading. Crucially, the rule’s language expanded beyond the statute’s use of “involve” to include contracts that “relate to or reference” the prohibited activities—a distinction that would later become significant in litigation. This broader language potentially captures a wider range of contracts than the statutory text alone might suggest. Neither the statute nor the initial rulemaking defined key terms like “gaming,” leaving crucial interpretive questions unresolved. Indeed, when adopting Rule 40.11, the CFTC acknowledged that “the term ‘gaming’ requires further clarification” and indicated it might issue future guidance, though it would not do so for over a decade.

These interpretive questions came to a head in the case of KalshiEX LLC v. CFTC. The dispute centered on Kalshi’s proposed Congressional Control Contracts–binary options that would allow traders to take positions on which political party would control each chamber of Congress. In September 2023, the CFTC determined these contracts violated Rule 40.11. In order to do so, the Commission argued that Congress, by using the word “involve” in the Special Rule, intended to capture both contracts whose underlying event is an enumerated activity and contracts with a “different connection” to enumerated activities because they ‘relate closely’ to, ‘entail,’ or ‘have as an essential feature or consequence’ one of the enumerated activities. They moved to contend that Kalshi’s Congressional Control Contracts involved “gaming” because that term “includes betting or wagering on elections.” Moreover, the Commission found the contracts were unlawful under state law, as many states prohibit betting or wagering on elections. Finally, the Commission determined the contracts were not in the public interest for two reasons: they were unlikely to be used for commercial-risk “hedging” or “price basing,” and they could threaten election integrity by creating monetary incentives for voters to support particular candidates or incentivizing the spread of misinformation. 

Beyond these strictly legal considerations, Chairman Behnam expressed concern that approving such contracts would require the CFTC to “exercise its oversight and enforcement authorities in the manner of an election cop.” The Chairman’s concern reflected the CFTC’s broader position that allowing such contracts would require the agency to investigate potential market manipulation that could affect election integrity—a role traditionally reserved for election officials and law enforcement agencies.

The District Court sided with Kalshi on September 12, 2024, rejecting the CFTC’s broad interpretation that “gaming” encompasses gambling. Both parties moved quickly following this ruling—Kalshi attempted to launch its Congressional Control Contracts, while the CFTC sought to block their trading through emergency stays. Judge Cobb denied the CFTC’s emergency motion to stay the judgment, allowing Kalshi to briefly list the contracts. However, later that same day, the CFTC secured an emergency administrative stay from the Circuit Court, forcing Kalshi to pause trading pending further legal proceedings.

The Circuit Court’s October 2024 decision denying the CFTC’s emergency stay request marked a significant development in the Kalshi saga. To obtain a stay pending appeal, the CFTC needed to demonstrate four factors: (1) a “strong showing” of likely success on the merits, (2) irreparable injury absent a stay, (3) no substantial harm to other parties, and (4) the public interest favored a stay. In a unanimous decision, the three-judge panel (Millett, Pillard, and Pan) focused particularly on the third, irreparable harm prong, finding the Commission’s claims of potential damage to election integrity were too speculative to justify emergency relief.

The CFTC had argued that irreparable harm would occur because Congressional Control Contracts “could potentially be used in ways that would harm the integrity of elections, or the perception of integrity of elections.” However, the Court found this possibility of harm insufficient, emphasizing that “irreparable harm must be ‘both certain and great,’ and ‘actual and not theoretical.’” The Court noted that the CFTC had failed to explain why traditional tools for regulating market manipulation would not work in the election-contract context, pointing out that the Commission already has the authority to serve subpoenas, call witnesses, and hold hearings to investigate manipulation.

The legal debate has taken on increased urgency as Kalshi moves to expand its offerings. Following the Circuit Court’s stay denial, Kalshi swiftly launched its contracts and within days had listed over two dozen new options related to political outcomes, including presidential race predictions, popular vote margins, Electoral College results, and individual Senate contests. Trading volume quickly exceeded $3 million, primarily concentrated in contracts concerning the presidential election.

These ongoing legal developments will determine not only the fate of Kalshi’s contracts but also the broader future of regulated political betting markets in the United States. The resolution of these issues could either open the door to sophisticated financial instruments tied to political outcomes or reinforce traditional restrictions on election-related wagering. The result may ultimately depend on how courts balance the CEA’s grant of authority to the CFTC against principles of statutory interpretation and administrative law that limit agency discretion.

While the legal battle over political betting markets centers on questions of regulatory authority and public interest, equally important is the empirical question of these markets’ actual utility. Research has revealed several key advantages that prediction markets hold over traditional forecasting methods.

III. UTILITY AND POTENTIAL DRAWBACKS

Prediction markets demonstrate remarkable effectiveness as forecasting tools, the 2024 presidential election serving as a powerful demonstration. While traditional polls suggested a neck-and-neck race, markets like Kalshi and Polymarket showed Trump with better-than-even odds weeks before Election Day. “Polls 0, Prediction markets 1,” declared Kalshi CEO Tarek Mansour after Trump’s victory, highlighting what market proponents saw as a clear vindication of their approach. As Snowberg et al. demonstrate, the utility of prediction markets stems from three key advantages: superior accuracy, rapid information aggregation, and their ability to provide continuous, real-time probability estimates of future events.

A.     Superior Forecasting Accuracy

Empirical evidence consistently shows that prediction markets outperform alternative forecasting methods. In a comprehensive study of Economic Derivatives markets, Gürkaynak and Wolfers found that market-based forecasts exhibited lower statistical errors than surveys of professional forecasters across multiple macroeconomic indicators. The markets’ mean absolute error was approximately 5.5% lower than professional forecasts across all examined series, a difference statistically significant at the 5% level.

B.     Rapid Information Aggregation

Prediction markets excel at swiftly incorporating new information into forecasts. The killing of Osama bin Laden provides a striking example: prediction markets adjusted to reflect this development eight minutes before any mainstream media outlet reported the news. This speed advantage stems from markets’ ability to incentivize informed trading while aggregating dispersed information from multiple sources.

In the corporate context, Chen and Plott’s seminal study at Hewlett-Packard found that prediction markets consistently outperformed official company forecasts of printer sales, even though these official forecasts were made with knowledge of the market predictions. This suggests markets can effectively aggregate information that might otherwise remain scattered across an organization.

C.     Continuous Probability Assessment

Perhaps most importantly, prediction markets offer continuous, probabilistic forecasts rather than point estimates. During the 2024 presidential election cycle, this allowed markets to capture subtle shifts in electoral dynamics that binary polls missed. The ability to track changing probabilities in real-time represents a significant advance over traditional forecasting methods that provide only periodic updates or point estimates.

This continuous assessment proved particularly valuable during the Second Iraq War, where prediction markets helped quantify both the likelihood of military action and its potential economic impacts. Market prices revealed that each 10% increase in the probability of war corresponded to a $1 increase in oil prices, providing crucial information for economic planning.

D.     Potential Drawback — The Manipulation Problem

Despite their utility, political prediction markets face a significant challenge: their susceptibility to manipulation. Analysis of historical cases reveals several distinct patterns of manipulative behavior that warrant serious concern.

The 2008 presidential election provided a striking example when suspicious trading activity appeared on Intrade. Multiple large-volume buy orders rapidly pushed McCain contract prices up to ten points above prevailing market rates, while simultaneous sell orders drove Obama contracts significantly below market prices. As Intrade CEO John Delaney acknowledged, a single “institutional” investor had purchased a large number of McCain contracts, creating price discrepancies of up to ten points between Intrade and other prediction markets like Britain’s BetFair. The timing of these trades—often occurring during unusual hours and periods of relative political calm—further suggested manipulative intent rather than genuine information trading.

Similar patterns emerged in May 2007 with the “Hillary Clinton Wins Presidency” contracts on Intrade. The contract price suddenly jumped from twenty-three points to forty points, creating illogical pricing relationships—for instance, the combined probabilities for different Democratic candidates exceeded 100%. Most tellingly, the elevated prices persisted for a week in unusually high volume, suggesting a sustained effort to influence public perception of Clinton’s viability.

Perhaps the most explicit example of attempted manipulation occurred during the 1999 Berlin state election. The headquarters of the Free Democratic Party (FDP) directly emailed party members, encouraging them to purchase FDP contracts on the Wahl$treet prediction market, explicitly stating that “many citizens do not think of the PSM as a game, but consider it a result of opinion polls. Hence, it is important that the price of the FDP [] rise during the last days.” After this coordinated effort, FDP contract prices rose until the final pre-election price announcement, then fell by thirty percent once reporting ended.

These cases demonstrate a consistent pattern: manipulators often willingly accept trading losses to achieve their primary goal of influencing public perception about candidate viability. While prices typically revert to accurate levels relatively quickly, the temporary distortions can create misleading signals about electoral prospects. The fact that manipulators frequently lose money on these trades suggests their motivation lies not in direct market profits but in the broader impact on public perception of political races. The analysis of both historical precedent and modern evidence reveals a complex picture of political prediction markets’ potential benefits and risks. As the United States enters a new era of regulated political betting

CONCLUSION

The development of political prediction markets in the United States has come full circle—from the bustling betting markets of 19th-century Wall Street, through a period of prohibition, to the recent Kalshi decision enabling regulated electoral contracts once again. The historical record demonstrates both the persistent utility of these markets as forecasting tools and their enduring vulnerabilities to manipulation. As documented across multiple cases from the 2008 presidential election to the 1999 Berlin state election, manipulators have consistently attempted to influence public perception through market prices, often willingly accepting trading losses to achieve their broader political aims.

Despite these challenges, the Kalshi experiment represents an unprecedented opportunity to test whether a fully regulated exchange can effectively manage manipulation risks while preserving the benefits of political prediction markets. As these markets continue to evolve, their success will likely depend on striking the right balance between accessibility and integrity—allowing broad participation while implementing safeguards against the types of manipulation that have historically plagued electoral betting. The outcome of this experiment may well determine whether political prediction markets can fulfill their promise as a valuable tool for aggregating public knowledge about electoral outcomes, or whether concerns about manipulation will continue to cast doubt on their reliability as tools for forecasting.