EXPLAINER-Event contracts: Trading's next big thing or 'backdoor to gambling'?

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By Niket Nishant

March 18 (Reuters) - Event contracts have exploded in popularity since the U.S. presidential election, fueling a heated debate between traders who have embraced the nascent asset class and critics who liken it to gambling.

Several market players such as retail-favorite Robinhood and Interactive Brokers ( IBKR ) have rolled out event contracts in recent months, looking to cash in on the boom.

Robinhood on Monday also launched a standalone hub on its app to allow traders to wager on college basketball and U.S. interest rates.

Here is how event contracts are shaping up as a new asset class:

WHAT ARE EVENT CONTRACTS?

Event contracts allow traders to bet on specific outcomes, offering opportunities to profit from predictions on everything from sports and entertainment to politics and the economy.

Users can speculate on the likelihood of a movie surpassing a certain Rotten Tomatoes score, the probability of the U.S. entering a recession this year, or the possibility of bitcoin's price breaching a new milestone.

When event contracts became more popular ahead of the U.S. presidential election, Elon Musk said on X that prediction markets were "more accurate than polls, as actual money is on the line."

HOW DO THEY WORK?

Unlike gambling, where bets are placed against the house, event contracts function as a marketplace between traders.

Such contracts typically pay out $1 if the event occurs. Their prices fluctuate depending on the likelihood of the underlying outcome.

WHY ARE EVENT CONTRACTS MAKING HEADLINES?

While proponents of event contracts see them as a new avenue for traders, their road to legitimacy has been fraught with challenges.

In 2023, the U.S. Commodity Futures Trading Commission rejected a proposal by prediction marketplace KalshiEX to permit trading of political event contracts tied to Congressional control, saying they involved unlawful gaming and were "contrary to the public interest."

Kalshi sued, and was cleared to resume trading these contracts in October. The ruling also encouraged others waiting to dip their toes into the sector.

Still, concerns remained. In a January interview with the Financial Times, former CFTC Chair Rostin Behnam said he was concerned about the legality and social impact of bets on political and other events.

Robinhood was also forced to roll back its Super Bowl event contracts in February, just a day after the launch, following a request from the CFTC.

WHAT'S NEXT?

The rise of event contracts reflects the trend of "democratization" in financial markets as firms seek to attract retail investors. An anticipated wave of deregulation under President Donald Trump may help companies facilitating these trades.

CFTC Acting Chair Caroline Pham's pledge to end "regulation by enforcement" could also foster a more collaborative environment.

Critics, however, still voice concerns.

"These contracts are a backdoor attempt to bring gambling into financial markets," said Cantrell Dumas, director of derivatives policy at Better Markets, a group that advocates stricter oversight of the financial sector.

"Expanding the CFTC's role into gambling would stretch its limited resources and divert it from its core mission of overseeing legitimate derivatives markets."

Russ Mould, investment director at AJ Bell, likened the contracts to other speculative investment vehicles, such as leveraged exchange-traded funds.

"Investors should never mistake a bull market for brains and the risk remains that confidence leads to overconfidence," he said. (Reporting by Niket Nishant and Manya Saini in Bengaluru; editing by Arpan Varghese, Devika Syamnath and Alan Barona)