At a time when liquidity and listings continue to drift toward the US, Europe and the UK risk missing another structural shift and could result in European exchanges losing further relevance and flow to overseas platforms.

While often framed as gambling these markets are, in many respects, a simplification of existing trading activity. Some trading strategies are quite complex because they require trading a combination of equities, derivatives or commodities to take a position on one event or theme. For example, taking a view on whether interest rates will fall might involve shorting bank equities, going long on government bonds and using interest rate futures or swaps to hedge exposure. That same view could instead be expressed through a single contract tied to a defined outcome, such as whether a central bank cuts rates by a specific date.

They also produce meaningful signals. A study from the Federal Reserve Bank of New York found prediction markets can, at times, outperform professional economists in forecasting US interest rate decisions, highlighting their potential role as a complementary source of market insight.

For Europe, the implications are both strategic and structural. Prediction markets are emerging as a new way to express views on global events. If European participants increasingly turn to US platforms to trade those views, European exchanges risk losing trading volume and influence over price discovery in areas that directly affect their own markets.

There is also a retail dimension. European exchanges have historically struggled to capture retail flow, much of which now sits with brokers and offshore platforms. Prediction markets could provide a more accessible entry point for this audience, while also offering practical use cases beyond speculation. Event-based contracts could allow businesses or investors to hedge specific risks – such as policy decisions, commodity shocks or even weather-related impacts – in a more direct way than traditional instruments.

However, any prediction markets in Europe would need their own distinct model to those in the US. Regulators are right to raise concerns around binary payoff structures, controversial contract types and the potential for market abuse. But these issues are not insurmountable. Instead, they point to the need for a more controlled framework that focuses on economically relevant events, stronger participant verification, and avoiding the more problematic categories around death and conflict seen in some US prediction markets.

There are also structural considerations. Binary contracts, which settle at either zero or one, are difficult to hedge and can create challenges for margining and clearing, particularly given the potential for sudden price changes as events unfold. One possible solution is to require contracts to be fully funded. While less capital-efficient, this reduces systemic risk and may be better suited to European regulatory preferences. This is typically the case with prediction markets in the US, but the recent approval for Kalshi to offer margin trading to institutional investors suggests this may change.

Work is also needed from those facilitating trading in these markets. For retail brokers and other institutional traders, robust trading infrastructure is needed to handle the fast-moving activity. Some prediction contracts have extremely short durations, placing greater emphasis on real-time data, execution speed and reliable mechanisms for resolving outcomes. Adapting legacy trading systems to prediction markets is not sufficient and could see limited or flawed adoption.

Prediction markets are not without flaws. But institutional investors are looking to it for market signals and to hedge event risk. For Europe, the choice is whether to engage and shape this development or risk watching it happen elsewhere. A well-designed European model could strengthen retail engagement, improve price discovery and ensure that activity linked to European markets remains within European infrastructure. Failing to act risks repeating a familiar pattern, where innovation happens abroad and Europe is left to follow.