CFTC Warns Prediction Markets to Fix Deficient Incentive Program Filings

The U.S. regulator overseeing prediction markets platforms such as Kalshi and Polymarket is cautioning the industry that it is developing poor compliance habits that could open the door to market abuse.

The U.S. Commodity Futures Trading Commission (CFTC) issued additional guidance warning prediction markets platforms about how they manage their incentive programs. The agency stated that firms must file their programs properly and avoid structures that could incentivize harmful trading behavior.

As with any regulated trading platform under the CFTC's authority, prediction markets firms routinely seek to attract high-volume traders and encourage firms to serve as market makers in order to deepen participation and boost trading volume. However, the CFTC has grown concerned about the methods being used, according to guidance issued on Wednesday.

The U.S. derivatives regulator cautioned event-contract platforms that it is observing a rising number of filings related to incentive programs, many of which are frequently "procedurally or substantively deficient." These deficiencies, the document noted, hamper the agency's ability to determine whether a platform "has provided adequate notice of the terms of the program and sufficiently evaluated the program's compliance."

The CFTC identified specific features within these rewards programs that "present compliance concerns." Rewards designed for high-volume participants can encourage traders "to trade solely to reach volume targets, heightening risks of wash-trading, pre-arranged trading, or other fraudulent, manipulative, or disruptive trading practices." Such concerns echo long-standing issues the CFTC has policed in traditional futures markets, where incentive structures tied to volume have historically been vectors for illicit activity.

Market-maker programs, in which firms are incentivized to handle either side of a market, have also drawn scrutiny. Some of these programs guarantee net profits or cover losses "through stipends and rebates," which the regulator warned could similarly foster fraudulent behavior and market manipulation.

The CFTC has taken a leading role in fostering the development of U.S. prediction markets. It has mounted legal battles against states that sued prediction markets firms for allegedly violating local sports-gambling regulations. In June, the agency proposed its first prediction-markets rule.

At the same time, the agency has been steering the expanding industry through guidance and advisories on how to properly comply with existing rules for designated contract markets (DCMs) under its oversight. This includes an advisory issued last month warning platforms against cutting corners in templated contract certifications. The back-to-back advisories signal that as prediction markets attract growing mainstream attention — spanning political elections, sports, and crypto-linked events — regulators are intent on ensuring the sector's rapid growth does not outpace its compliance infrastructure.