Prediction markets are quickly shifting from a niche sideline to an emerging asset class, with monthly volumes around $10 billion, said U.S. bank Citizens. Though tiny next to the more than $10 trillion in U.S. equities, they are growing fast as platforms like Robinhood (HOOD), Kalshi and Polymarket scale.
The bank said these markets address a core flaw in traditional finance by letting investors trade directly on events like inflation figures, election results, Federal Reserve decisions and regulatory approvals instead of relying on blunt proxies such as futures, exchange-traded funds (ETFs) or single-name stocks.
Robinhood’s acquisition of MIAX’s derivatives exchange is seen as a key step toward vertical integration and deeper ties with institutional investors, positioning event contracts as a bridge between retail and professional liquidity, analysts led by Devin Ryan wrote.
While regulatory uncertainty, fragmented rules and thin liquidity remain risks, the analysts said prediction markets are already proving more responsive than polls or price proxies around U.S. elections and bitcoin ETF approvals. The markets’ probabilities are likely to be wired into quant models, risk dashboards and corporate planning, they said.
Over time, the analysts see these contracts evolving into a mainstream tool for hedging, speculation and information, with the potential to support a multitrillion-dollar annual market as institutional participation ramps up.
So far, adoption is skewed to retail users, both because the contracts are simpler to grasp than many derivatives and because sports events have been a natural on-ramp, the report noted.
But as liquidity grows, market makers deepen their presence and spreads tighten, the bank expects institutional investors to move in.
Event-driven hedge funds could use prediction markets around M&A, litigation and regulatory milestones. Macro funds might lean on CPI surprise markets, election odds and geopolitical contracts as targeted hedges.
Quant firms could treat prediction markets as high-frequency data feeds, mapping shifting probabilities to price moves across equities, FX and commodities. Corporate issuers may monitor these markets to time capital raises or assess the likelihood of regulatory changes that affect their business, the report added.
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