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Prediction markets let people trade contracts tied to defined future outcomes. A contract’s terms determine what counts as the result, what it pays, which source verifies the result, and when a venue can settle it. In a simple binary contract, the price can approximate the market’s implied likelihood—but it is neither a guarantee nor an objective forecast.
What an event contract is
An event contract is a tradable position whose payout depends on a specified event or outcome. The contract’s written terms—not a trader’s general understanding of what happened—govern whether it pays. The Federal Reserve describes these contracts as options-like: a trader buys or sells a position at a price, and a binary contract can pay $1 if its stated outcome occurs and $0 otherwise. Other contract designs can offer several outcomes or partial payouts for ranges. Federal Reserve staff paper; CFTC consumer advisory
How price relates to implied likelihood
For a binary contract, price is often read approximately as the market’s implied probability. CME Group’s educational example uses a price range of $0.01 to $0.99: a $0.05 contract suggests roughly 5%, while a $0.95 contract suggests roughly 95%. That interpretation reflects the market’s current pricing, not a promise that the event has exactly that chance of occurring. Price can change as traders update their views and trade.
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The price is also not the same as a guaranteed return. If a “Yes” contract costs $0.45 and its terms say it pays $1 if the outcome is “Yes,” a correct position has a gross difference of $0.55 before fees. If it settles “No,” the buyer loses the $0.45 purchase price, plus any applicable fees. Net results can also depend on the price and fees if the trader exits before settlement. CME Group’s event-contract example
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What determines a contract’s payout
Settlement follows the contract’s specific wording and rules. Before taking a position, identify the exact event definition, the outcome options, any thresholds or time windows, and the payout attached to each outcome. In particular, do not assume that an event’s ordinary-language meaning is the same as the contract’s definition.
For a binary contract, the possible result may be a $1 payout for the stated outcome or $0 otherwise, as in CME’s example. But not every event contract is binary: some frameworks combine yes/no contracts, provide several possible choices, or define outcome ranges that can produce partial payouts. A complex structure may also have lower liquidity than a simpler one, according to the CFTC. CFTC consumer advisory
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How settlement is decided
The market’s rules should identify the criteria for determining the result, the authoritative source or sources, and who makes the determination. The CFTC says customers are entitled to clear information about payouts and how, when, and by whom settlement decisions will be made. A venue may rely on an official data source rather than an informal report or an apparent real-world outcome.
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For example, Kalshi says its market team finalizes a result after the official outcome is confirmed. It may wait for finalized information from a source agency, such as an official sports statistics source or a government release. The applicable market rules govern the actual determination. Kalshi: How does settlement work?; CFTC consumer advisory
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Why a market can still be pending after an event
Event end, trading close, and settlement are separate points in the process. A displayed market close time does not necessarily indicate when the outcome will be determined. Settlement may remain pending while a source agency finalizes data, or because the contract rules specify a later determination time.
Kalshi’s Help Center says most of its markets settle within a few hours after an outcome is known, often within about three hours. That is Kalshi’s general timing description, not a fixed deadline for every Kalshi market or a promise about other venues; official data and the specific market rules can affect timing. Kalshi: How does settlement work?
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Can a trader exit before settlement?
A position does not necessarily have to be held until the event resolves. CME says a trader may trade a position multiple times and close it before the event occurs or while it is taking place. The result of an early exit depends on the available exit price, fees, and liquidity. A quoted or implied likelihood does not guarantee that a position can be sold at that price, or at all, when a trader wants to exit. CME Group’s event-contract example
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Use the contract rules and current market information to assess the position, rather than relying on a headline or a general probability interpretation.
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- Definition and version: Read the exact event wording, outcome choices, thresholds, and applicable contract version.
- Settlement basis: Find the named source, the criteria for resolving the contract, the determination process, and any stated timing.
- Payout structure: Confirm whether the contract is binary, offers multiple outcomes, or pays by range.
- Trading economics: Check the current price, fees, available liquidity, and whether an exit before resolution is possible.
- Venue and eligibility: Review the venue’s rules, oversight, and jurisdiction-specific eligibility. Do not assume all venues or regions have the same protections or availability.
- Risk: Consider the possibility of losing the amount committed and any applicable costs. The CFTC advises customers to review risks, costs, commissions, penalties, and contract-specific settlement rules, and to trade only with risk capital. CFTC consumer advisory
Why source quality and contract wording matter
Clear, objective criteria tied to reliable, independently checkable data can make a result easier to verify. Kalshi’s market-suggestion guidance emphasizes an objective event definition, clear settlement criteria, reliable source data, and a proposed timeframe. Kalshi: How to suggest a market
Some contracts raise added concerns when they depend on a person’s discrete conduct rather than an independently generated and externally verifiable result. In a September 22, 2026 staff advisory, the CFTC Division of Market Oversight said such “mention markets” present heightened manipulation risks. That concern makes the source and the possibility of influence part of understanding a contract’s design; it does not establish how common misconduct is across prediction markets. CFTC Division of Market Oversight advisory 26-27
In the United States, CFTC-regulated exchanges are subject to exchange rulemaking, surveillance, and regulatory oversight intended to deter manipulation and insider trading. Those controls do not eliminate financial risk or guarantee immediate settlement. The CFTC also described enforcement examples in a February 25, 2026 advisory: a candidate traded on his own candidacy, and an individual affiliated with a YouTube channel likely had advance access to video contents before publication. The advisory illustrates potential conflicts and information advantages; it is not a measure of how prevalent misconduct is. CFTC Division of Market Oversight advisory 26-27; CFTC Enforcement Division advisory
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