How prediction markets are structured

When prices move quickly, a trade doesn’t fill, or an outcome feels surprising, it’s natural to wonder what’s happening behind the scenes. Many people assume there’s a single entity setting prices, taking the other side of your trade, or acting as “the house.” That assumption is incorrect and leads to confusion and oftentimes, mistrust.

Prediction markets don’t work that way. They’re structured much more like traditional financial markets, where no single participant controls prices or outcomes. Understanding who does what in this system helps explain a number of things. Once this structure is clear, many of the behaviors of event contracts start to make a lot more sense.

Prediction markets are not controlled by a single platform. Instead, they function as an ecosystem made up of separate entities and participants. At a high level, there are four key groups:

• Exchanges: Responsible for listing and settling event contracts. Examples include Kalshi, ForecastEx, and CME Group, among others.
• Brokers & FCM’s: Provide access to event contracts by offering the trading platform, handling order execution, safeguarding customer funds, and providing customer support—for example, Robinhood.
• Regulators: Prediction markets and event contracts are regulated as cleared swaps under the oversight of the Commodity Futures Trading Commission (CFTC) and National Futures Association (NFA).
• Market participants: Traders and market makers who trade contracts, provide liquidity, and collectively drive prices as expectations change.

Each group plays a distinct role, and together they form an interconnected system.

In prediction markets, exchanges provide the structure, traders express expectations, and source agencies provide the facts. While not a part of the formal prediction market structure, source agencies play a critical role in prediction markets. These are the organizations whose data is used to determine whether an event contract resolves to Yes or No. Source agencies don’t create markets, list contracts, or participate in trading. Instead, they operate at arm’s length, providing the official data that exchanges rely on to settle contracts once an event concludes.

Different event contracts rely on different source agencies. For example:

• Sports contracts may use official league results, box scores, or governing bodies to determine winners, scores, or player outcomes.
• Weather and climate contracts often rely on national meteorological agencies or designated weather stations for temperature, precipitation, or storm data.
• Political contracts typically use official election authorities, certification bodies, or government sources to determine outcomes like election winners or vote counts.
• Economic data contracts depend on government statistical agencies or central banks for releases such as inflation, employment, or interest-rate decisions.

These agencies don’t change how they collect or publish data because prediction markets exist, and they don’t express opinions about outcomes. Their role is simply to report results using established methods. That separation is intentional—it ensures contracts resolve based on predefined, objective sources rather than interpretation or market sentiment.

This is also why reviewing a contract’s resolution terms matters: each contract specifies which source agency is used, what data point determines settlement, and when an outcome is considered final.

Exchanges, such as Kalshi or ForecastEx, sit at the core of prediction markets. Their job is to create the marketplace itself. You can think of these entities as the prediction-market equivalent of the New York Stock Exchange (NYSE) or Nasdaq in the stock market.

An exchange defines the event contract—its exact wording, its settlement, and the rules for how the outcome will be resolved. It also operates the system that matches trades and ultimately determines how contracts settle once the event concludes.

What exchanges don’t do is predict outcomes or set prices. They provide the structure, not the opinion. Importantly, these exchanges are regulated by the Commodity Futures Trading Commission (CFTC). That oversight helps ensure contracts are clearly defined ahead of time, settlement rules are established in advance, and markets operate under consistent regulatory standards.

A broker/futures commission merchant (FCM), like Robinhood, acts as the intermediary between customers and the exchange, providing access to markets, safeguarding customer funds, and operating under regulatory obligations designed to protect customers and their interests. The broker provides the interface through which you can view contracts, see prices, and place trades. It also handles account management and the submission of orders to the exchange, among other responsibilities.

What’s often misunderstood is what brokers don’t do. Brokers don’t create event contracts, decide how they resolve, or control where prices move. They also aren’t the counterparty to your trades. When you place an order, it’s sent to the exchange, where it interacts with orders from other market participants. When you reach out for help, it’s important to keep this distinction in mind.

Every trade in a prediction market requires a willing counterparty. That counterparty might be another individual trader expressing the opposite view, or it might be an institutional participant.

In many cases, that counterparty is a market maker—a professional participant whose role is to provide liquidity by continuously quoting prices at which they’re willing to trade contracts.

Market makers don’t control outcomes or guarantee trades. Like all participants, they manage their own risk and adjust prices based on supply, demand, and market conditions. Their presence helps markets function more smoothly, but they don’t dictate direction.

How prices actually form

Prices in prediction markets emerge from the interaction of many independent market participants and the decisions they make. As participants become more confident that an outcome will occur, they’re willing to pay higher prices for that contract, pushing prices up. When confidence fades—or uncertainty increases—participants demand lower prices, and prices tend to move down. This adjustment happens continuously as new information arrives and expectations shift.

Prices can change even when no obvious news breaks. Shifts in sentiment, changes in liquidity, or the arrival of large orders can all influence pricing. No single participant sets the price; it’s the result of collective activity. This is why prices sometimes move in ways that feel unexpected. Markets are responding not just to headlines, but to how participants interpret risk and probability in real time.

Because prediction markets rely on willing participants, liquidity isn’t constant. It can vary depending on the event, how much time remains before resolution, and how much interest there is.

In some situations, you may not be able to exit a position at the time or price you expect. In others, trading may pause temporarily. These conditions aren’t the result of a broker decision—they’re a natural feature of open markets that depend on participation.

For this reason, many experienced participants approach event contracts assuming they may need to hold positions until settlement, even if they plan to exit earlier.

Once you understand how prediction markets are structured, it becomes easier to set realistic expectations. You’re not trading against a platform or your broker. You’re participating in a market where prices reflect collective beliefs and where outcomes are determined by events—not by any single company’s decisions.

This perspective can help encourage thinking about liquidity, risk, and position sizing instead of trying to assign blame when trades don’t go as planned.

Prediction markets are built on a clear division of roles. Exchanges define and settle contracts, brokers provide access and protect customer interests, market makers supply liquidity, and participants collectively determine prices. Regulators help ensure markets operate under established rules and oversight.

Understanding this structure helps explain why event contracts behave the way they do and why thoughtful risk management is essential. Once the mechanics behind the market are clear, it becomes much easier to approach event contracts with discipline and realistic expectations.

Continue learning about risk management in prediction markets in the next article . If you have account-specific questions or need help related to prediction markets, event contracts, or Robinhood policies, please visit the Robinhood Help Center or reach out to our support teams from within the app.