Prediction Markets and Adjacent Markets

What Adjacent Markets does

• Builds indices from event contracts, combining prices across prediction-market exchanges into broader, easier-to-trade views.
• The aim is to help investors and media follow themes—such as political momentum—without researching or trading many individual contracts.
• The company also builds rates, which combine prices for the same event across exchanges, potentially weighting them by volume or liquidity.

Examples of its indices

• Politics: “Red” and “Blue” indices aggregate hundreds of elections. They are designed to continue over time as one election cycle rolls into the next. Their scale runs from 50 to 150, with 100 representing an even balance.
• Sports: NFL and NBA team indices combine four components: championship, conference, division, and total wins. Team indices reset to 1,000 each season. Additional thematic indices can group teams by traits such as having a new coach or a top-ranked offense.
• Economics: A market-based “Misery Index” combines expectations for inflation and unemployment. Unlike the traditional index, it uses event-contract prices to update frequently and potentially reflect expectations before official data does.
• Other themes: A proposed Middle East stability index could combine factors such as shipping through the Strait of Hormuz, oil markets, and regional elections.

Why bundle contracts into indices?

• Indices let people express a broad view without having to select individual races, games, or economic outcomes.
• A basket can reduce reliance on any one thinly traded market; weighting toward more liquid components may also help larger investors trade with less market impact.
• Diversification can reduce the risk of a single contract going to zero, though it does not make an index inherently safe. Event-based indices may remain volatile and can react sharply to major developments.

Business model and growth

• Adjacent Markets expects to earn revenue primarily by licensing index data to financial-product issuers.
• Fees may be fixed or tied to a product’s assets, so the business benefits if products using its indices attract substantial investment.
• The company’s hoped-for breakthrough is SEC approval of ETFs holding event contracts. Such products have been proposed, but the interview notes that none had yet been approved.
• Another possible use is for exchanges to list simple contracts on whether an index will rise or fall by a given date.

Industry outlook

• The guest sees similarities to early cryptocurrency markets, including regulatory uncertainty, but believes prediction markets are institutionalizing faster because large financial firms already have digital-asset teams and infrastructure.
• Even if sports contracts face regulatory restrictions, he expects the broader prediction-market industry to continue, particularly in economics and other financial applications.
• Earnings-beat contracts are another potential product, though the guest says regulators would need to clarify how they should be treated.
• Mainstream adoption may come when prediction markets become useful in everyday decisions—for example, buying weather contracts to hedge the risk of an outdoor wedding. Wedding planners might eventually include weather hedging in their services.