Event Contracts: What They Are and How They Are Used

What Are Event Contracts?

Event futures contracts allow people to speculate on the outcome of a specific event, such as the result of a political election, the winner of a sports championship, or the closing point value of a benchmark average like the S&P 500. Most are formatted for putting money on “yes” or “no” outcomes before expiring.

The existence of these products is contentious, and for good reason. There have always been event contracts, but they were considered gambling and barred in the United States. In countries where they are allowed, as in the United Kingdom, they fall under their gambling laws.

Understanding Event Contracts

Event contracts result from long-term trends coming together in the financial markets and the wider culture. Let’s set out some of them:

1. The “financialization” of options, futures, and other forms of financial trading that were once mostly used for hedging or insurance has meant that speculation keeps growing compared to the traditional hedging in these and other investment vehicles.
2. The legalization of sports gambling in the late 2010s resulted in betting app advertisements becoming ubiquitous. This occurred around the same time as free investment trading apps helped dramatically increase retail trading on futures, options, and other instruments. Many individuals tell researchers they simply switch from their betting app to their trading app and back again, which can account for the increasing numbers of people who confuse investing with gambling.
3. There has been the growing gamification of investing, which some now term “gamblification,” which refers to how some investment apps are designed to match the fake-points-earned, colorful formats encountered first on gambling platforms.
4. There has been a massive rise in futures and options trading over the last decade by retail investors—often with little financial knowledge—trading in sometimes-complex derivatives. A 2022 Financial Industry Regulatory Authority (FINRA) study found that almost two-thirds used online platforms for trading. Still, the average investor couldn’t answer more than half of 10 basic financial knowledge quiz questions.
5. Since the establishment of the CFTC in 1974, futures contracts have gradually expanded their scope well beyond agricultural commodities. The 1970s saw the introduction of currency futures, followed by the emergence of stock index futures in the 1980s, which marked a crucial step in connecting the major exchanges of New York with the options and futures trading on the Chicago-based trading floors. In the 1990s and 2000s, contracts became available for a still-wider range of assets, including interest rates, energy, weather, telecommunications bandwidth, and more abstract forms of “underlying assets.” In this context, the rise of event futures can be seen as a natural progression.

Event Contracts: A Contentious History

There has been a long history of bans and restrictions on event contracts in the U.S. In the late 19th and early 20th centuries, bucket shops were where individuals placed bets on stock prices without owning the shares. These were eventually banned because of concerns about fraud and price manipulation. In the modern era, the CFTC has moved many times to halt efforts at trading what it believes are games of chance, which it defines as purely speculative and lacking any economic purpose.

In 2012, the North American Derivatives Exchange (Nadex), a designated contract market (DCM), listed political event contracts for the results of the different 2012 federal elections. However, the CFTC prohibited Nadex from listing these contracts, citing three main reasons, which remain relevant when the CFTC reviews proposals:

1. The contracts involved “gaming,” which is prohibited under its Rule 40.11 (TAWGA), as some state statutes connect “gaming” and “gambling” to betting on elections. The CFTC regulation also “prohibits event contracts that reference terrorism, assassination, war, gaming, or an activity that is unlawful under any state or federal law...and that the CFTC determines by rule or regulation to be contrary to the public interest.” 
2. The contracts didn’t serve an economic purpose, as the economic consequences of an election are so unpredictable that the contracts could not reasonably be expected to be used for hedging purposes.
3. The CFTC said the contracts were contrary to the public interest and could negatively affect the integrity of elections by providing incentives to vote in certain ways because of them.

It wasn’t until the late 2010s and early 2020s that regulators allowed event futures contracts, with the CFTC granting DCM status to exchanges like Kalshi, marking a significant shift in the regulatory landscape. Other exchanges, like PredictIt, are run under so-called "no action letters," meaning they don't have DCM status. The CFTC is allowing them to run, essentially punting on the issue as the courts, changes in this area of trading, the actions of other regulators in both the U.S. and abroad settle in this financial area.

Event Contracts vs. Other Futures

Unlike traditional futures contracts, which are staked to the expected prices of commodities, financial instruments, or indices, event futures are priced according to the perceived likelihood of particular events winning or losing. The Chicago Mercantile Exchange (CME) has been offering event futures since 2022, allowing clients to choose “yes” or “no” on the predicted closing price of Bitcoin, commodities, and indexes. Kalshi is another major purveyor of event contracts; the online platform has been the most out front defending event contracts’ legitimacy while offering a far wider variety of them than the CME.

When Kalshi received approval to trade from the Commodity Futures Trading Commission (CFTC) in 2020, CEO and co-founder Tarek Mansour called it a “paradigm shift,” then added, “This designation opens a new chapter in U.S. financial history, one where investors can hedge and mitigate everyday risks.” That can be hard to square with the platform’s offerings a few years later, which include some finance-related “yes”/“no” contracts (“Big tech layoffs this year?”), though many are related to not-very-hedge-seeming contracts, like those on the Oscars, the number of Transportation Security Administration (TSA) check-ins for specific two-week periods, and the chances of assorted pop stars releasing new albums this year.

Kalshi's Samantha Schwab says critics have it wrong. "Every contract has a hedging use case, even the less obvious ones." She pointed out that historically speaking, each new investment product has faced challenges that it was nothing other than games of chance. "People used to say grain futures were gambling products before the Supreme Court approved them and said they were ultimately needed for hedging purposes," Schwab said. "Some people will, of course, speculate on these contracts, but speculators are needed to make a market for those that need to hedge their risk."

Regulators, market participants, and researchers will continue to grapple with the blurring of the lines between investing and gambling while working to ensure the integrity and fairness of the futures markets. Though event futures can provide a means for hedging risk and information gathering—after all, the CME has been offering weather futures for decades—they also raise important questions about the boundaries of speculation and the potential for firms releasing products to profit from problem gambling in the financial markets. Time will tell if Schwab was right or too optimistic when she told us, "One day we’ll look back on the skepticism of these contacts as a hedging tool the same way we look back on how the public viewed grain futures."

We can see how far futures have come by comparing traditional and event futures. Here’s a table summarizing their differences below: