US prediction markets face fragmentation as legal battles mount

The legal divide centers on whether contracts traded on a Commodity Futures Trading Commission-registered exchange fall under federal derivatives law or state gambling regulations. While a Third Circuit panel previously allowed Kalshi to bypass New Jersey’s gambling laws, the Ninth Circuit recently ruled in favor of Nevada regulators, prompting New Jersey to petition the Supreme Court for a definitive resolution.

Aaron Courtney, co-founder of the analytics platform Kalshinomics, warns that the judiciary is outpacing market data. While national contracts remain resilient, local event markets are showing signs of strain. In Washington, where restrictions on sports and political betting were recently implemented, local weather contracts saw a 17.7% decline in volume, though researchers note this remains within the range of normal seasonal fluctuation.

Liquidity risks are most acute in niche, state-specific markets. Courtney observed that Washington Supreme Court race contracts currently suffer from significantly wider bid-ask spreads compared to national sports events. As states like Michigan impose heavy daily fines and others mount legal challenges, the industry faces an environment where trading access—and the quality of price discovery—increasingly depends on a user's zip code.