The Bucket Shop Returns
What the Nineteenth Century Can Teach Us About Prediction Markets, Retail Derivatives, and the CFTC’s Accidental Jurisdiction over American Gambling
“Those who cannot remember the past are condemned to repeat it.”
— George Santayana, The Life of Reason (1905)
The Original Prediction Markets
In the storefronts and hotel lobbies and drug stores of 1880s America, a new kind of establishment appeared. They were called bucket shops, and they offered ordinary people — clerks, factory workers, small shopkeepers — the opportunity to speculate on commodity prices and stock prices without actually buying anything. A customer would deposit a dollar and “purchase” the right to profit or lose based on the movement of wheat, corn, or railroad stock prices posted on a ticker tape. No actual commodity changed hands. No stock certificate was issued. The bucket shop operator took the other side of every trade. The customer was betting against the house.
The parallel to modern prediction markets is not metaphorical — it is structural. A Kalshi user who purchases a contract on whether the Kansas City Chiefs will win the Super Bowl is making a binary bet against a counterparty, settled in cash, with no underlying commodity delivered. The bucket shop customer who “bought” wheat futures at a storefront in Chicago in 1890 was doing precisely the same thing. The legal distinction — that Kalshi is a CFTC-registered Designated Contract Market and the bucket shop was an unlicensed operation — is real. But the economic structure is identical: retail customers making leveraged directional bets against a centralized counterparty, with the operator profiting from the spread.
Jesse Livermore and the Retail Devastation
The most famous bucket shop trader in history was Jesse Livermore, who began trading at a Boston bucket shop in 1891 at the age of fourteen. By sixteen, he was trading full-time, earning $200 per week — a princely sum — from his bets on stock price movements. From 1893 to 1897, he accumulated $10,000 in profits, a one-thousand-percent net return. Bucket shop operators recognized him as a consistent winner and banned him from their establishments. He adopted disguises and false names to continue trading.
Livermore was the exception that illuminated the rule. For every Jesse Livermore, there were thousands of anonymous clerks and shopkeepers who lost their deposits. Bucket shops operated with extreme leverage — as high as 100-to-1, where a $1 deposit controlled $100 in notional exposure. The shops routinely manipulated prices, delayed quotes, or simply absconded with customer funds. There were no capital requirements, no segregation of customer accounts, no regulatory oversight of any kind. The operators made their money not from the spread but from the statistical certainty that most customers would lose.
Congress’s Response: The Grain Futures Act of 1922
Congress passed the Grain Futures Act in 1922 following the Crisis of 1921, when wheat prices fell by more than half and speculative excesses were blamed for amplifying the collapse. The Act required that futures trading occur on licensed exchanges under federal supervision. Its purpose was explicitly to eliminate bucket shops — to end the era of unregulated retail speculation in commodity prices. The original impetus for the Commodity Exchange Act is found in these bucket shops: unregulated, often unscrupulous businesses offering the promise of easy money while trading against customers to wipe them out, wasting customer assets with foolish bets, or simply absconding with customer money.
A century later, the CFTC — the regulatory descendant of the Grain Futures Act — is now using its authority over commodity derivatives to authorize a new generation of binary speculation platforms for retail customers. The same regulatory apparatus that was created to protect retail participants from bucket shop operators is now being invoked to shield those operators’ modern equivalents from state regulation. If Santayana’s dictum about the repetition of history needed a case study, the CFTC’s prediction market policy would serve.
The E-Mini Revolution and What It Taught Us
The CME’s introduction of E-mini S&P 500 futures in 1997 is often cited as the successful democratization of derivatives access. Sized at one-fifth the standard contract, the E-mini lowered capital requirements and opened futures markets to sophisticated retail traders. It traded 7,000 contracts on its first day, 80,000 daily three years later, and nearly 2,000,000 daily today. In 2019, the CME launched Micro E-mini contracts at one-tenth the E-mini size, further lowering barriers to entry.
But the success of E-minis obscures a critical distinction: E-mini futures are used primarily by professional and semi-professional traders for hedging and directional strategies in equity indexes — the most liquid, most transparent, most efficiently priced market in the world. Prediction market contracts on whether a specific NFL player will rush for more than 75 yards bear no resemblance to an E-mini hedge. They are not hedging instruments. They do not discover prices that improve resource allocation. They are consumer entertainment products dressed in the language of derivatives regulation.
The 0DTE Lesson: What Happens When Retail Meets Derivatives
In 2022, the Chicago Board Options Exchange introduced daily expiration dates on option contracts, and the result was the most comprehensive natural experiment in retail derivatives access since the bucket shops. Zero-days-to-expiration options — 0DTE — averaged over 1.5 million trades daily, constituting 51 percent of the S&P 500 index’s total options volume. For most of 2022 and all of 2023, 0DTE contracts comprised more than 75 percent of retail trade volume for all SPX contracts. Retail traders found them irresistible: the premiums were low (cents rather than dollars), the potential returns were enormous, and the time horizon was measured in hours.
The outcomes were catastrophic. Retail traders lost a total of $350,000 per day on 0DTE options from their introduction. Across all options, retail traders executing options from November 2019 through June 2021 lost an average of $5.03 million per day, totaling $2.1 billion. The average option investor loses 1.81 percent per month. Researchers found that retail investors overpaid for options relative to realized volatility, incurred enormous bid-ask spreads (typical percentage half-spreads of about 8 percent), and responded sluggishly to announcements even as prices predictably decayed. In India’s equity derivatives segment, which provides the most comprehensive retail derivatives loss data, 91 percent of individual traders incurred net losses.
Binary Options: The Closest Precedent
The closest regulatory precedent for prediction markets is the binary options market of the 2010s — and that precedent should terrify anyone who cares about retail investor protection. Nadex, the only CFTC-regulated binary options exchange, operated under strict capital requirements, customer fund segregation, and reporting obligations. It matched buyers and sellers rather than taking the other side of trades. It announced its retirement from the platform in December 2025, transitioning to Crypto.com.
But Nadex was not the binary options market. The offshore binary options market — which operated from Israel, Cyprus, and various Caribbean jurisdictions — became the largest retail fraud epidemic of the decade. The FBI’s Internet Crime Complaint Center received four complaints in 2011 with losses of $20,000. By 2016, it received hundreds with millions in losses. The CFTC charged six individuals in the Cartu Brothers case for operating a scheme that received over $165 million. In 2025, a federal court ordered an international enterprise to pay over $451 million for global binary options fraud.
Israel banned binary options entirely in 2017. The European Securities and Markets Authority prohibited binary options for retail clients across the EU in July 2018, then extended the ban permanently through national implementations. ESMA also restricted CFD leverage to 30:1 for major pairs and 2:1 for crypto. The message from European regulators was unambiguous: retail customers cannot be trusted with binary speculation products, and the regulatory cost of protecting them exceeds the market’s informational value.
Weather Derivatives: The Model That Works
There is one category of event-like derivatives that has operated successfully under CFTC oversight without provoking gambling-law challenges: weather derivatives. The CME introduced exchange-traded weather futures and options in 1999. Contracts reference heating degree days and cooling degree days measured against a 65°F baseline. Trading volumes surged over 260 percent compared to 2022, with outstanding contracts up 48 percent year-on-year as of May 2023.
The weather derivatives market works because it is anchored in genuine commercial hedging. Utilities, energy companies, agriculture firms, breweries, and amusement parks use HDD/CDD contracts to manage weather-related revenue risk. The typical counterparty is a hedge fund or insurance company, not a retail speculator. The contracts were classified as commodities rather than gaming precisely because their economic function — risk transfer between commercial parties with genuine exposure — was never in doubt.
The Commercial Hedging Question: What the Conventional Criticism Gets Wrong
The conventional criticism of prediction markets — that event contracts on sports, political, and entertainment outcomes serve no commercial hedging function — is incomplete, and its incompleteness weakens an otherwise sound regulatory argument. The assertion that “no business needs to hedge the risk that the Philadelphia Eagles will lose the NFC Championship” is empirically false. Hotels, restaurants, and tourism operators in the host city earn materially more revenue when a local team advances to and wins a championship. A Super Bowl victory for the Kansas City Chiefs measurably increases hotel occupancy, restaurant traffic, and retail spending across the Kansas City metropolitan area for weeks. Convention bureaus and municipal tax authorities have documented these effects. The commercial exposure is real, quantifiable, and unhedgeable through existing derivatives or insurance instruments.
The same analysis applies across event categories. Movie production companies and their distributors have genuine financial exposure to viewership outcomes — a film’s opening-weekend box office determines the profitability of hundreds of millions in committed marketing expenditure, and no existing derivatives market hedges this risk. Energy companies, defense contractors, pharmaceutical manufacturers, agricultural producers, and financial institutions all have material exposure to election outcomes that determine regulatory policy, tax treatment, subsidy structures, and government contracting priorities. A pharmaceutical company whose drug pipeline depends on FDA staffing decisions has genuine commercial exposure to the outcome of a presidential election. A defense contractor whose revenue depends on Pentagon budget allocations has genuine commercial exposure to which party controls Congress. These are not theoretical interests — they are line items on balance sheets.
The correct question, then, is not whether commercial hedging value exists in event contracts — it does — but whether that hedging value requires retail participation to produce efficient pricing. This is the question the prediction market industry has never seriously addressed, and it is the question on which the regulatory analysis should turn.
The Institutional Sufficiency Question
Weather derivatives provide the instructive comparison. The CME’s HDD/CDD market operates almost entirely between institutional counterparties: utilities hedging mild-winter revenue loss, energy producers hedging strong-winter supply costs, agricultural firms hedging drought risk, insurers and reinsurers managing weather-correlated catastrophe exposure, and specialized hedge funds providing liquidity. Retail speculators are virtually absent from this market. Yet it prices weather risk efficiently, with sufficient liquidity for commercial users to manage genuine exposure. The market works precisely because the participants have naturally opposing commercial exposures — what harms a utility helps an energy producer — and those opposing exposures generate enough bilateral trading interest to sustain price discovery without retail liquidity.
Could event contract markets function the same way? The structural conditions are not identical to weather derivatives, but neither are they as different as the prediction market industry implies. Consider a championship event contract. A hotel chain with properties in the host city has commercial exposure to the outcome. A competing hotel chain in rival cities has the opposite exposure. A municipal bond fund holding stadium-district revenue bonds has exposure. The regional broadcaster has exposure. The local convention bureau has exposure. Stadium concessionaires, merchandise licensees, and ground-transportation companies all have exposure. These entities have naturally opposing positions — one city’s gain is another city’s loss — and if assembled into a bilateral market, they could theoretically sustain price discovery without retail speculators.
The same logic applies to political event contracts. An energy company that benefits from one party’s regulatory approach is a natural counterparty to a renewable energy firm that benefits from the opposite approach. A defense contractor exposed to one party’s spending priorities is a natural counterparty to a healthcare company exposed to the other’s. A pharmaceutical manufacturer facing different FDA policy regimes under different administrations has genuine hedging interest, as does a financial institution facing different regulatory postures from the CFPB or SEC. The question is whether the institutional market alone generates sufficient liquidity for efficient price discovery, or whether retail participation is a necessary condition for these markets to function.
If institutional participants alone can sustain efficient pricing — as they do in weather derivatives, interest rate swaps, credit default swaps, and virtually every other OTC derivatives market — then the case for retail access to event contracts must stand or fall on its own merits, independent of the commercial hedging justification. And if the case for retail access cannot be separated from the commercial hedging justification, then prediction markets should look like weather derivatives: institutional, bilateral, and ancillary to genuine risk transfer — not like the mobile sports betting apps they currently resemble.
The Three-Tier Framework: From Macro Events to Micro Props
This analysis does not apply uniformly across all event contracts. The commercial hedging justification operates on a spectrum, and the spectrum tracks the granularity of the reference event.
Tier One: Macro-Level Event Outcomes. Championship results, election outcomes, major entertainment benchmarks (opening-weekend box office, season premiere viewership), and significant policy decisions all have identifiable commercial hedging constituencies. The commercial nexus is traceable — hotel revenues to championship outcomes, corporate earnings to regulatory regimes, production budgets to viewership thresholds. The opposing exposures are genuine: one city’s championship loss is another’s gain; one party’s electoral victory shifts value between competing industries. The case for derivatives treatment is defensible, provided the market can demonstrate that commercial hedging — not retail speculation — is the primary function.
Tier Two: Game-Level and Event-Specific Outcomes. The result of an individual regular-season NFL game, the margin of victory in a specific election contest, or the opening-night attendance of a specific film occupies a middle ground. Local hospitality businesses, stadium-adjacent operators, and regional media companies have some commercial exposure to these outcomes, but the nexus is attenuated. The hotel that benefits from a Chiefs Super Bowl victory does not have a meaningfully different revenue profile based on whether the Chiefs beat the Chargers in Week 14 by three points or seven. The commercial hedging argument exists but weakens substantially at this level of granularity.
Tier Three: Individual Performance Statistics and Proposition Bets. Contracts referencing the specific number of yards rushed by an individual running back, the exact points scored by a specific player in a specific quarter, whether a particular batter records a hit in a particular at-bat, or the precise time of a specific in-game event have no traceable commercial hedging justification. No hotel’s revenue turns on whether a running back gains 76 or 74 yards. No production company’s profitability depends on the exact minute a television episode’s ratings peak. No commercial enterprise has a balance-sheet exposure that can be traced to an individual player’s statistical performance in a single game. These contracts are pure speculation products, functionally indistinguishable from the proposition bets offered by licensed sportsbooks, and the commercial hedging argument cannot credibly reach them.
The significance of this three-tier framework is that it exposes the prediction market industry’s rhetorical strategy. The industry uses the Tier One commercial hedging argument — which has genuine merit — to justify Tier Three products — which have none. When pressed on whether a contract on Patrick Mahomes’s passing yards serves a hedging function, the industry pivots to the informational value of election prediction markets. The two arguments are unrelated, but the pivot is effective because it conflates the strongest justification for the weakest product. The regulatory framework must address each tier separately, because the justifications are categorically different.
The CFTC’s Accidental Jurisdiction
The Commodity Futures Trading Commission was created in 1974 to regulate commodity futures and, later, swaps. Its expertise lies in price manipulation, market integrity, clearing requirements, and position limits for agricultural commodities, energy products, metals, and financial instruments. The Dodd-Frank Act of 2010 expanded the CFTC’s jurisdiction to include swaps, creating the framework under which event contracts could arguably be classified as derivatives.
But Dodd-Frank also added Section 745(b), codified as CEA Section 5c(c)(5)(C), which specifically authorizes the CFTC to prohibit event contracts involving “gaming” — an acknowledgment by Congress that event contracts might constitute gambling and that the CFTC needed tools to prevent its derivatives authority from becoming a backdoor to unregulated gaming. The CFTC under Chairman Behnam proposed using this authority in May 2024 to ban political and sports event contracts. The CFTC under Chairman Selig withdrew that proposal in January 2026 and rescinded the accompanying advisory guidance.
The reversal is not merely a policy change — it is a redefinition of the CFTC’s institutional identity. An agency created to regulate wheat futures and interest rate swaps is now asserting exclusive jurisdiction over what is, by any functional measure, sports wagering. The price discovery argument — that prediction markets generate informationally valuable price signals — is theoretically sound for political event contracts and may be empirically supported. But sports prediction contracts, which constitute 85 percent of Kalshi’s volume, generate no price signal that is not already produced, with greater accuracy and liquidity, by the licensed sportsbook market. And the commercial hedging argument, while valid for macro-level event outcomes, cannot stretch to cover the micro-level proposition bets that constitute the bulk of retail trading volume. The CFTC is not filling a gap in American information markets. It is creating a regulatory arbitrage that allows gambling platforms to evade state taxation and consumer protection.
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The bucket shops were eliminated because Congress concluded that unregulated retail speculation in commodity prices imposed social costs that exceeded whatever liquidity or price discovery benefits the shops provided. A century later, the regulatory descendant of that congressional judgment is authorizing the bucket shops’ return — under a different name, through a different legal theory, but with the same economic structure and the same likely consequences for the retail participants who will, as always, constitute the majority of the losses.