Prediction markets are moving deeper into U.S. financial markets, creating new venues for traders to speculate on individual companies, stock indexes and corporate events. The expansion is drawing regulatory scrutiny because these contracts can resemble traditional financial derivatives while operating outside many of the investor protections and surveillance frameworks associated with regulated securities exchanges.

Equity-Linked Markets Gain Traction

Polymarket International launched individual-stock markets last October, and traders have since placed more than $220 million across roughly 31,000 equity-linked markets through early September, according to an analysis by blockchain research firm Allium prepared for Reuters. Nearly 60% of that activity involved contracts tied directly to individual stock movements, with Nvidia, Alphabet, Apple and Tesla among the most popular underlying companies. The remaining activity involved ETFs and stock indexes.

The contracts generally allow participants to take a “yes” or “no” position on whether a stock or index will reach a specified level by a particular date. Allium identified one wallet that generated approximately $175,000 in Apple-related trading volume through about 1,300 trades, illustrating how participants can construct positions around the outcome of individual contracts rather than owning the underlying shares.

A New Regulatory Boundary for U.S. Markets

The central issue is how these products should be classified under U.S. financial law. The Commodity Futures Trading Commission has argued that prediction markets effectively involve derivatives contracts, while regulators and market participants are debating whether the Securities and Exchange Commission should also play a primary role. Under U.S. law, contracts linked to a single stock are generally treated as security-based swaps, a category overseen by the SEC and largely restricted to professional investors.

The distinction becomes more complicated with contracts linked to corporate performance indicators. Legal experts cited by Reuters have suggested that certain KPI contracts could also fall within the security-based swap framework, although Kalshi has disputed that interpretation. The SEC and CFTC jointly sought public feedback in June on the regulatory treatment of these markets and whether one agency should become the primary regulator.

Investor Protection and Market Integrity in Focus

The regulatory debate extends beyond jurisdiction. Traditional exchanges operate under extensive requirements involving market surveillance, disclosure, trading conduct and investor protections. Legal experts have warned that rapid growth in equity-linked prediction markets could eventually influence trading in the underlying securities, potentially making it more difficult for regulators to identify manipulation or insider trading. Vanderbilt University Law School associate dean Yesha Yadav described the development as a new frontier in market structure and called for an urgent regulatory response.

Polymarket and Kalshi have said they monitor their platforms for misconduct and cooperate with U.S. authorities. Polymarket has also said it works to prevent U.S. users from accessing its international platform, while its newer CFTC-regulated U.S. exchange does not currently offer individual-stock markets but does provide some corporate KPI contracts.

What Regulators Could Address Next

The growth of stock-linked prediction markets creates a developing question for the broader U.S. financial system: whether existing securities and derivatives rules can adequately cover products that combine elements of wagering, derivatives and market speculation. Senator Adam Schiff has argued that Congress should prevent traditional financial products from being packaged as prediction contracts to circumvent securities laws, while industry participants maintain that these markets represent a new financial-market structure.

For global investors, including institutions monitoring U.S. equities from Israel, the next developments will center on the SEC-CFTC regulatory framework, classification of stock-linked contracts, market-surveillance requirements and access for retail participants. The relatively small size of these markets means their immediate impact on U.S. equities remains limited, but continued expansion could make their relationship with traditional exchanges increasingly important to market structure and investor protection.