Why Sports-Related Prediction Markets Could be Harmful to Consumers

1.     Introduction

The regulation of sports betting and how sports-related prediction markets fit in is important because gambling harms consumers by placing them in a position of a mathematically guaranteed disadvantage. Common law tests for gambling fail to capture gambling’s distinct harmful nature by only considering the relative aspects of skill and chance within an activity, but state gambling statutes in the places where gambling is most prevalent better account for the danger of gambling by classifying percentage games as gambling. It is currently unclear whether sports-related prediction markets are governed by federal law or state law, but either one can handle their regulation, provided that they keep gambling’s percentage game nature at the center of the analysis.

2.     The True Danger of Gambling and Why it Should be Regulated

Central to the intersection of sports betting and sports-related prediction markets are the considerations of what gambling actually is and why it is important to analyze whether existing legal frameworks are sufficient to handle these markets. In short, why does this topic matter? When people think of gambling, some might think of it as a risky endeavor—risky in the sense that, maybe they win, maybe they lose. In reality, gambling is far from risky. For a casino or sportsbook, gambling is about as much of a sure thing as there is. To oversimplify, “[t]he house always wins.” If the house always wins, who is losing?

Casinos and sportsbooks are in a position of inevitable profitability because they offer what the law calls “percentage game[s].”  In a percentage game, “the house collects money calculated as a portion of the wager made or sums won in play.”  A percentage game places the house in the position of obtaining profit without incurring any risk of loss. Roulette is an example of a percentage game, commonly listed in proximity to the percentage game phrasing within state statutes. A quick breakdown of roulette reveals how percentage games work.

Roulette features a wheel with thirty-eight tiles, numbered 00,0, and 1–36.  To play the game, the roulette wheel is spun, the ball is dropped in the wheel, and the ball eventually settles in one of the tile spots. One possible bet is a bet on any single number.  With this bet, there is 1/38 chance that it will win. However, a winning single number bet only pays 35x the money.  Thus, if a player bets $1 and loses, they will lose $1. But if the player wins, instead of receiving $38, they only receive $35. The casino keeps the remaining $3, or 7.89%, of the winnings for themselves. This 7.89% is the money calculated as a portion of the sums won in play that the house collects, making roulette a classic percentage game. Thanks to mathematical formulas like this, which are also present in all other casino games, it becomes impossible for there to be any such thing as a profitable player in the long run.

Sportsbooks also have a percentage game nature to them, known as Vigorish (“Vig”). Vig is the “built-in-commission” in a sportsbook that “is not displayed as a separate fee but is instead embedded in the odds offered” and allows the sportsbook to “earn a profit regardless of the result of a sporting event.” Vig is similar to house edge in a casino. It guarantees a margin of profit for sportsbooks by slightly tilting the odds in their favor. Sports bettors therefore face a “mathematical disadvantage” and even “well-reasoned bets . . . fight[] an uphill battle.” As a result, 97% or more sports bettors lose money in the long run.

Gambling’s percentage game nature is why its regulation is crucial. Gambling is worse than risky for a player, because the player is mathematically guaranteed to lose money over time. This mathematical guarantee is what makes gambling dangerous for consumers. Any legal framework that considers sports-related prediction markets and their gambling status must consider the percentage game nature of gambling.

3.     State Law on Gambling

State common law classifies an activity as gambling when a participant pays consideration for the opportunity to win a prize in a game of chance. Skill is the counterpart to chance. Whether a game is one of chance is determinative, and there are three tests for whether a game is a one of chance: the predominant factor test, the material element test, and the any chance test. If a game is one of chance then it is gambling, but if it is one of skill then it is not gambling.  All three tests consider the relative aspects of skill and chance in an activity to determine its gambling status.

Unfortunately, these tests miss the mark, because they fail to address the percentage game nature of gambling, which is the part most dangerous to consumers. One justice’s dissent in a recent New York case highlights this failure. In White v. Cuomo, New York’s highest court considered the gambling status of Daily Fantasy Sports contests. The court applied the predominant factor test and found “resounding support” for the legislature’s determination that these contests were games of skill and not chance. Judge Wilson dissented, critiquing a gambling classification that analyzed a game’s relative measure of skill or chance. He contemplated that under the majority’s analysis, “blackjack . . . and commonly understood forms of gambling [would] not [be] gambling, because of the level of skill they entail.”

Judge Wilson is correct. He mentioned blackjack, which undoubtedly involves significant skill and strategy. There are over 1,300 books covering blackjack listed on Amazon alone. These books are authored by “serious blackjack players” who have “spent hours studying various blackjack strategies.” Yet, despite the overriding presence of skill in blackjack, it is unquestionably gambling. Moreover, even with perfect strategy, the player only has a 42% chance of winning, a 49% chance of losing, and an 8.5% chance of tying. The player is guaranteed to lose in the long run, in spite of the predominant level of skill involved, because blackjack is a percentage game. It would be naïve to not classify blackjack as gambling due to the skill involved. In this way, common law gambling tests fall short of protecting consumers by failing to capture a definitive aspect of gambling.

Contrastingly, state gambling statutes do address gambling’s defining characteristic. To name a few, Nevada, New Jersey, and California all classify “any . . . percentage game” as gambling. Nevada’s classification of percentage games as gambling is particularly significant, given that Nevada is “the state which has the greatest acquaintanceship with commercial gambling.” Second to Nevada in that department is New Jersey. Indeed, Nevada is home to Las Vegas and New Jersey is home to Atlantic City, the two cities who have historically monopolized casino gambling. Each year from 2001–2014, Nevada accounted for the highest percentage of U.S. gambling revenue amongst states, and New Jersey accounted for the second highest. The states who are most closely acquainted with gambling choosing to classify percentage games as gambling should play a crucial role in analyzing a particular activity’s gambling status.

4.     How Should Sports-Related Prediction Markets Fit In

With respect to sports-related prediction markets, their gambling status remains undetermined. It is currently unclear if these prediction markets are financial assets, in which case they would be exclusively overseen by the Commodity Futures Trading Commission (“CFTC”), or if they are instead gambling, in which case they are reachable by state gambling law. The Commodity Exchange Act (“CEA”) provided the CFTC with exclusive jurisdiction over accounts, agreements, and transactions involving swaps or contracts of sale of a commodity for future delivery. Thus, the CEA may have preempted state gambling laws, and courts have come to different conclusions on this issue. In Kalshiex, LLC v. Hendrick, the court found that a sports-related prediction market, Kalshi, was subject to the exclusive jurisdiction of the CFTC and that state law was preempted. However, in Kalshiex LLC v. Martin, currently on appeal, the court instead concluded that the CEA does not preempt state gambling laws with respect to sports-related event contracts. Under either legal framework, there is the potential for properly addressing these markets, so long as each framework follows the proper approach.

If state gambling law is preempted by the CEA’s grant of exclusive jurisdiction to the CFTC on future financial assets with respect to these markets, then the CFTC can take action to ensure consumers are protected. The CEA empowers the CFTC with a “special rule for review and approval of event contracts,” which allows the CFTC to determine that event contracts “are contrary to the public interest” if they “involve” certain activity, including “gaming.” Hence, the CFTC is explicitly empowered to outlaw these markets if they are gaming. The CFTC should certainly consider whether they are gaming. In doing so, they should examine whether the markets are offering a percentage game, because that is the aspect of gambling that is dangerous to consumers, as analyzed above.

On the other hand, if state gambling law is not preempted, then states should consider for themselves whether these markets are gambling or not. In so doing, they should avoid the common law tests for gambling, because they fail to address gambling’s harm to consumers. Instead, they should look to statutory schemes that define gambling as percentage games, because this approach will ensure consumers are best protected. In sum, whether the CFTC or state gambling law is the proper source for classification of these markets, either one is capable of addressing the markets, provided that they consider the percentage game nature of gambling.

With respect to how such an analysis applies to these markets, it could go either way. Given that there is no house and that the contracts are peer-to-peer, it does not seem that there is a house collecting a portion of the wagers made or sums won in play, as the definition of a percentage game requires. On the other hand, the “main source of revenue for exchanges and brokerages is the fees they charge on each trade,” which seems like these platforms are collecting a portion of the trades made. Such a setup may make it next to impossible to be a winning trader in the long run, in the same way that it is next to impossible to be a profitable sports bettor in the long term due to the percentage game nature of sports betting. Nevertheless, the fees charged on each trade may not be as significant as the percentage of Vig in a sportsbook bet or percentage of winnings kept by the casino in a roulette game. Moreover, if the fees charged on each trade are not unique to the sports-related prediction markets, or even are not unique to the prediction markets in general, then such fees may not actually make these sports markets a percentage game.

5.     Conclusion

In sum, the regulation of sports betting matters because of sports betting’s potential to harm consumers. What makes gambling harmful to consumers is its percentage game nature, which places consumers at a mathematical disadvantage, guaranteed to lose money in the long run. State common law does not address the percentage game nature of gambling, but crucial state statutes do. No matter whether the CFTC or state common law will be charged with the task of regulating sports-related prediction markets, the percentage game nature of gambling should guide the analysis.

Louis Christifano is the 2026 Conduct Detrimental Writing Competition Winner. This article placed him first.