The logo of prediction market online platform Polymarket in Washington on March 20.THEO MARIE-COURTOIS/AFP/Getty Images
Atul Tiwari is an asset management executive and a former corporate and securities lawyer. Previously he was the inaugural CEO of Vanguard Investments Canada and the founding president of BMO ETFs.
Recent headlines about new prediction market offerings in Canada have triggered a familiar reaction seen globally: Concerns that these listed event contracts are equivalent to gaming, or worse, a pathway to insider activity or manipulation. Those concerns are understandable. But in many cases, they are based on a misunderstanding of how these markets work and how they should be regulated.
Properly designed prediction markets are not simply speculative products. They are tools for generating real-time, actionable information.
Prediction markets have existed for decades, and a substantial body of academic and real-world evidence has found that the incentivized and aggregated “wisdom of the crowds” can outperform traditional professional forecasting methods. The Iowa Electronic Markets has been more accurate in forecasting U.S. elections than hundreds of traditional polls since 1988. Recent research posted on the U.S. Federal Reserve Board website has found that prediction market forecasts of the federal funds rate and inflation have provided statistically significant improvements over fed funds futures and professional forecasters. Another study found that prediction market forecasts of company earnings were more accurate and less biased than analyst forecasts.
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This informational power is recognized by media and finance companies such as CNN, The Wall Street Journal and Google, who have struck data deals with prediction markets. These markets can also be used by investors and advisors in portfolio construction, and by businesses and policymakers in decision making. They offer more accessible ways for individuals to manage certain types of financial exposure.
Traditional markets already allow participants to express views on future events. Financial markets enable trading on many variables such as interest rates, commodities, stock indexes, crypto prices, weather outcomes and economic indicators. These instruments are widely used for both long-term and short-term hedging and price discovery. Trading in financial instruments that expire on the same day they are traded – also known as zero-day-to-expiry (0DTE) options – grew five-fold since 2022, with retail flow making up 50 to 60 per cent of that movement. Extending this framework to other types of verifiable events represents a logical evolution.
It is important, and in the public interest, that these early and evolving financial markets are designed and supervised to meet the core objectives of securities regulation: market integrity, transparency and investor protection. To be sure, questions remain around surveillance, information asymmetry and potential insider manipulation. Recent events have underscored both the rapid evolution of these markets and real concerns around insider information and market integrity. They also demonstrate that regulators and market operators are increasingly able to detect and act on misconduct. Continuing to address these risks will be critical to building public confidence in the category.
Washington steps up scrutiny of prediction markets
Settlement mechanisms, surveillance tools and monitoring frameworks should evolve alongside the market itself, toward standards comparable to those used in traditional financial and derivative markets. Regulation should be principles-based. Certain event-based contracts sit at the intersection of existing frameworks: securities, derivatives and gaming. Collaboration between regulators may be important to ensure consistent oversight without creating gaps or unnecessary duplication. For example, a contract that is transparently priced, exchange-traded and subject to trading surveillance may warrant a different regulatory approach than one where a central operator sets prices, assumes risk and takes profits.
Canadians are accessing these markets today. History tells us that in the absence of clear domestic regulated pathways, participation by Canadians in new global innovations does not disappear; it often shifts to platforms with less, or no, oversight. Ontario’s iGaming framework, where certain sports and political outcomes are available, provides a useful example. Before regulation, most online wagering by Ontarians occurred on unregulated platforms. Following the introduction of a regulated market, participation shifted significantly toward licensed operators, increasing from roughly 30 per cent to 84 per cent over three to four years. This transition improved oversight and strengthened consumer protections.
With AI, crypto/stablecoins, tokenization of securities and blockchains, regulators are increasingly being asked to assess new categories that do not fit neatly within existing frameworks. Prediction markets are the latest example.
Canada has, and will, lead in emerging areas of financial and regulatory innovation. I have seen this firsthand. Canada was home to the world’s first exchange-traded fund, a groundbreaking and initially misunderstood concept, and a once-nascent market that I had the privilege of helping develop with Vanguard and BMO. At the time, ETFs were unfamiliar to most Canadians and used by very few advisors. Today, they are widely recognized as one of the most efficient and effective investment vehicles ever created. Innovation in financial markets often begins with skepticism but, when structured properly, can deliver meaningful and lasting value.