Smarkets CEO Predicts Challenges Ahead for American Prediction Markets as Trading Volumes Increase

Jason Trost, CEO of Smarkets, has warned that while trading volumes in American prediction markets are increasing, most exchanges may struggle to survive when subsidies end. In an exclusive interview with Benzinga, Trost stated, "I would argue most prediction markets in the United States do not have the right setup to be a sustainable business without subsidy."

In September, Kalshi reported that traders spent approximately $14.7 billion on contracts, with its headline volume reaching a record $60.7 billion, representing a 52% increase from August. Smarkets, founded in 2008, is one of Britain’s largest betting exchanges and is currently seeking CFTC approval to operate a regulated prediction-market exchange in the U.S.

Trost explained that while many American exchanges use investor capital to attract customers and provide incentives for market makers and brokers, this approach is not sustainable. He noted, "If you're paying market makers and you're paying brokers to send you traffic... yes, you can get tons of volume on your system." He cited Lionel Messi's promotion of Kalshi during the World Cup as an example of attracting volume through celebrity endorsements. However, Trost questioned the viability of such models once subsidy funds are exhausted.

A key challenge for these exchanges is maintaining a balanced marketplace with enough buyers and sellers to ensure competitive pricing. Some exchanges compensate professional traders for liquidity, yet Trost emphasized that reliance on ongoing subsidies is risky. Smarkets had previously faced similar issues but resolved them by establishing its own market-making operation, which he referred to as crucial to their business.

Drawing lessons from the betting exchange industry in Britain, where the number of operators has significantly decreased due to liquidity issues, high fees, and competition from traditional bookmakers, Trost highlighted another challenge for American exchanges: the practice of incentivizing brokers can only yield temporary results. He pointed out that brokers may eventually realize they can retain the entire fee if they navigate away from using exchanges.