The case against sports prediction markets is loud, and not hard to understand. An increasingly lightly-staffed federal regulator is suddenly overseeing products that look, to most people, an awful lot like sports betting. State regulators think they’re being screwed out of tax revenue. Sportsbooks see their market as being invaded.1 Consumer advocates worry the expansion will mean more losses, more problem gambling, and more money pulled out of investments and into bets. And the referees aren’t neutral: Donald Trump Jr. advises the two biggest platforms, Kalshi and Polymarket, while his father’s administration sues red and blue states alike that resist.
It’s a case built largely on the industry’s messiest examples—viral and misleading ads, skyrocketing losses, unfair political access. ProphetX, recently approved by the CFTC as the first sports-native exchange and clearinghouse, is a cleaner test of the industry’s affirmative case.2 The company isn’t pretending sports trading is spiritually different from sports betting; it tried the state-regulated route first.3 Its argument is that structure matters: users trade against one another instead of a house, market makers compete to post prices, and the resulting product looks more like a financial exchange than a traditional sportsbook. I sat down with cofounder Jake Benzaquen for a wonky conversation about what, exactly, gets better when sports betting becomes an exchange—and what new problems arise.
Chapter timestamps for the recording are at the bottom.
The Price is the Product
The best case for prediction markets is that they offer better pricing than sportsbooks; while most users probably won’t win, they’ll lose less. Without heavy marketing spend and high taxes, peer-to-peer marketplaces can pass savings on to consumers. Betting on an NFL spread at DraftKings generally means risking $110 to win $100; the same bet at ProphetX costs about $105. In the long run, the average customer loses at a rate of 2-3%, instead of 4-5%, with bigger savings on more exotic wagers.
This is not true for Kalshi, where fees are so high—currently generating roughly $2 billion in annualized revenue—that prices are often equivalent to sportsbooks. ProphetX will start at a flat 2% commission, with no parlay fees. Jake is adamant that improved monetization won’t simply mean higher fees, but more volume and maker-taker pricing meant to “split the pie as evenly as possible” between liquidity providers, recreational “takers,” and the exchange.4
Peer to (Smarter) Peer
Prediction markets love to say you’re trading against your neighbor. Jake won’t: “the idea that you’re just trading against your friend is obviously disingenuous.” Most trades are against liquidity providers, often sophisticated trading firms, but their presence is necessary to post prices and “make” the market.5 Even so, he believes that retail-facing disclosures about who is on the other side of a trade are effectively “chasing your tail. It sounds easy on the surface, but there’s a lot of complexity.”
Internal Market Makers
Some prediction markets run their own in-house market maker, such as Kalshi Trading, which provides liquidity and sometimes seeks to profit on the markets its sibling exchange runs.6 ProphetX doesn’t. Jake says they can get enough liquidity from outside market makers, and points to a “long-term view… that playing in your own exchange causes a lot of downstream effects…the fairness, the quality of the pricing and the underlying mechanisms that power these markets get impacted when you have someone playing in the environment that you favor.”
Built for Sportsbooks, Not Exchanges
The obvious objection to sports prediction markets is that most states already have legal sports betting. So why should there be a federally regulated version at all—one that bypasses both the state regulatory framework and the high taxes sportsbooks pay?
Jake’s answer is that the state system simply cannot facilitate exchange wagering, because it doesn’t allow market making, institutional trading, or varied distribution channels. The CFTC, meanwhile, “has all of those things.” It’s also a matter of cost: between high state taxes and the 0.25% federal excise tax on handle, running a low-margin sportsbook is close to impossible.7 Jake described the federal path as not just easier for operators but fairer for consumers, who get better prices and more freedom to trade— “assuming [they’re] able to understand… how [sports markets] work.”
The State Regulation Dead-End
ProphetX didn’t start out federal. New Jersey let it launch one of the country’s first sports exchanges; everywhere else, Jake says, doors were “shut in our face every single time.” When ProphetX asked Virginia regulators how soon it could go live, it was told two to three years before anyone would even meet with them, because “they’re focused on understanding what sportsbooks are, and then after that they’re gonna work on casinos.”
State regulators, in his telling, have “prioritize[d] casinos and iGaming over actually fair marketplaces and exchange wagering—” a move that generated more tax revenue, at times against the interest of the citizens who wager.8 They “made their own bed by poor regulation, poor regulatory bodies, and a poor mindset.” As Jake puts it, borrowing a line from Twitter: “Congrats to the states: you lose. Now all the innovation is going to the feds.”
New or Stolen Money?
One of the loudest fights over prediction markets is whether their volume is new or poached. The American Gaming Association (AGA) argues platforms like Kalshi and ProphetX are siphoning billions in handle away from licensed sportsbooks, with state coffers paying the price. Others insist the volume is entirely additive, arriving through financial channels traditional sportsbooks cannot access.
Jake lands somewhere in the middle. He has little patience for the AGA, which uses “the least mathematical formulas of all time to create [that] narrative,” and credits Sporttrade CEO Alex Kane for “call[ing] them out on their BS.” But he doesn’t buy the all-additive story either. Are Robinhood’s parlay traders former FanDuel customers? “A lot were,” Jake figures, “but a lot weren’t.”
Maintaining Product Parity
In most states, sports betting is 21+. CFTC-regulated prediction markets are 18+.9 Asked about the younger bettors that allows, Jake told me: “Our decision was made out of parity to the rest of the market... if the CFTC chooses to change... to 21+, I certainly would completely understand and would even probably applaud that.”
Flagging Problem Trading
How ProphetX will catch problem trading isn’t settled yet. Responding to the idea of turning responsible-gambling tools on by default,10 Jake leaned the other way: “You probably make it more trigger based than actually default. That way you can observe specific behaviors that are leading to [problem gambling], and then try and cut it off at the head... repeated deposits… betting significantly above what their average trade size is. Things like that are probably the better mechanism… than defaulting it on or off.”
Some Form of Something
Prediction market advertising is barely regulated, and a lot of it promises easy money and frequently reaches minors. Jake agrees there’s a problem: “there’s nothing going on in terms of regulating these advertisements,” and thinks it should change but isn’t sure how. “There needs to be some form of something,” he says, for operators when they write their own rules. Right now there’s “nothing to point to.”
Equally important is who enforces any of it. While the CFTC has proclaimed full jurisdiction over prediction markets, it’s a financial regulator—marketing rules are “not their strong suit.” Still, there are “some extremely low-hanging fruit,” such as cracking down on affiliate marketing and mandating in-post disclosure. (I argued for exactly that in my own comment to the CFTC, which you can read in full here.) “It’s really easy, as an operator, to be like ‘it was an affiliate account, we’re no longer working with them, sorry about that,’” Jake says. You can just “scrub your hands of it… that’s not something that should be the case.”
(On June 20th, the Wall Street Journal reported that Polymarket had paid dozens of young creators to post videos of themselves placing trades and cashing in—except the trades were staged on lookalike copies of its site, and the winnings were invented. Creators were told to keep the payments quiet, and nearly a quarter of the videos worked in the word “free.” In 118 of the videos the Journal reviewed, creators appeared to win almost $900,000. Had those bets been real, they would have lost more than $166,000.)
Drawing Lines
A common theme throughout our conversation was how the line between gambling and investing keeps dissolving. Neither Jake nor I see much daylight between placing a sports trade and buying a zero-day option—if anything, the sports trade probably has a better expected return.11 But I still wince when I see sports promoted alongside stocks and bonds in financial apps, because I know how many Americans will, often to the detriment of their long-term finances, trade investments likely to grow for bets guaranteed to shrink. Much of ProphetX’s growth, meanwhile, is coming from brokerage integrations.
As to who’s responsible for the consequences of housing parlays alongside savings and investment accounts, Jake points to the brokers. “Not to just completely rinse myself of any blame here, but it really has to be on them… we can’t control how they offer our markets,” he told me.
He has a few ideas: “Educational stats or pop-ups on what margins look like on different products,” plus “disclaimers and…things that you need to check into rather than just terms and conditions.” Safe trading, in his framing, isn’t only a consumer-protection priority but a business necessity: “brokerages should be trying to [educate users] for the longevity of everyone.” He’s not optimistic, though, and thinks “it’ll only get a little bit worse before it gets better.”
It’s easier to point to what shouldn’t be done than what should. Jake says he’d probably back clear rules if they existed, but when it comes to special treatment for “gambling” products, he maintains “it’s more difficult to actually define…than to debate where it should be applied.” He worries about the addition of leverage and margin, which could easily get into “credit bookie type scenarios.”12
Jake criticized how state-regulated sportsbooks lure bettors into casino games: “As someone who lived in New Jersey and would open up the FanDuel [sportsbook] app, [where] they put the blackjack button right over where your bottom right thumb would be and you’d accidentally click every single time, and then play a hand…. It’s just messed up. [At ProphetX we’re] trying to prevent that, of course.”
Chapters
0:00 — Intro: ProphetX’s path to the CFTC
1:18 — The case for federal regulation
2:57 — Pricing and fees
5:08 — Who you’re really trading against
8:13 — Internal market makers
11:01 — Parlays and future regulation
13:10 — New money or stolen money?
16:17 — Lost tax revenue, or bad regulation?
19:30 — Low margins and 18-20 year old users
22:14 — Responsible-gambling tools
25:35 — Advertising and affiliate marketing
29:45 — Where gambling and investing blur
33:15 — Dark patterns
35:05 — My thoughts on how ProphetX could improve
38:32 — ProphetX’s pitch to bettors
40:02 — States without legal sports betting
41:52 — Should negative-sum investments carry a warning?
Some sportsbooks have moved into the space with their own prediction market offerings, mainly DraftKings and FanDuel.
ProphetX received both DCM (Designated Contract Market) and DCO (Derivatives Clearing Organization) approval June 11—meaning it’s cleared to both run the exchange and clear and settle its own trades, rather than relying on a third party. It’s the first sports-focused operator approved to do both, although Novig joined them as a regulated sports-focused DCM soon after.
ProphetX has cycled through regulatory homes. It started under the UK Gambling Commission, then became the first exchange to launch in New Jersey on a state sports-betting license. It handed that license back and moved to a nationwide “sweepstakes“ model—users play with virtual currency redeemable for prizes—which let it operate in 40-plus states without a gambling license. CFTC registration is the latest stop; as Jake tells it, the product is largely the same, but the new regulatory vertical unlocks more options.
In a maker-taker model, “makers” who post resting orders and supply liquidity pay lower fees (or earn rebates), while “takers” who get filled immediately pay more. More on that here.
Market makers post prices so other users can trade instantly instead of waiting for a matching counterparty.
Critics argue the arrangement creates a conflict, since the operator can profit on the same markets it runs and oversees. Kalshi Trading has historically posted a negative P&L, although it’s unclear how those numbers would look if fees generated for Kalshi Exchange were included.
The federal government levies a 0.25% excise tax on handle (the total amount wagered). Because it applies to handle rather than revenue, it falls hardest on low-margin operators.
“iGaming” means online casino games—slots, blackjack, roulette—as distinct from sports betting. It’s more lucrative for states and far more associated with problem gambling, hence Jake’s claim that state regulators are not acting in citizens’ interest. For more on why the revenue maximizing approach of state gaming regulators is often misguided, see this recent overview from Charles Lehman for the Manhattan Institute,
Because CFTC-regulated products fall under federal commodities law, there’s no state-style 21+ minimum. ProphetX is moving to 18+, matching Kalshi, while most state sportsbooks remain 21+
Common responsible-gambling (RG) tools include deposit limits, time limits, cool-off periods, and self-exclusion. “Default on” means a user opts out rather than opts in.
A zero-day-to-expiration (0DTE) option expires the same day it’s traded—a short-dated, lottery-like bet on where a price lands by market close.
Margin involves posting a fraction of a position and borrowing the rest, which applied to sports bets lets people wager money they don’t have. “Credit bookie” scenarios are where bettors wager on credit they don’t actually have on hand. Adding leverage or margin to sports trading raises the same risk: users losing more than they can cover.
