How Prediction Platforms Resemble Binary Options and How They Can Influence the Stock Market
Movchan's Group
Apr 8, 2025So-called prediction markets — platforms where users can bet on anything that can be forecasted — became mega-popular during the US presidential race. Now even major Western business media, including Bloomberg, refer to them as a relevant source for assessing event probabilities. Senior partner at Movchan’s Group and advisor to the GEIST fund, Elena Chirkova, discusses how to approach such markets.
Recently, exchanges where you can bet on events have gained popularity, for example, before the US presidential elections, you could bet on the victory of Trump or Harris. Of course, the idea is not new. Bookmakers appeared back in the mid-19th century. But we are interested in the fact that now you can also bet on the dynamics of the stock market. Thus, the online exchange Kalshi accepts bets on whether the S&P 500 index will break through levels of 4,500 or 4,000 points during 2025.
Speaking, for example, about the level of 4,500, the probability of reaching it dramatically changed over the weekend. This is related to the expected market drop on Monday due to a new round of tariff war escalation. Thus, on Friday, this probability was estimated at 24%, on Monday — 44%, and on Tuesday — already 49%. The exchange does not have its own probability calculation model; it calculates it based on participants' bets.
If someone suddenly decides to play this game, they must realize that, in essence, it is a game of binary options. The main problem with this type of instrument is that you lose all your money if you guess wrong — just like in 19th-century horse racing if you bet on the wrong horse. In many cases, as with the Kalshi exchange, there is secondary trading of options, but it cannot save you from losing all your money if the event has already occurred. That is, you lose all your money if you bet on Harris, and Trump was announced the winner.
The risk of trading binary options is considered so high that the European Securities and Markets Authority has banned their sale to individuals. The same has been done by similar authorities in the UK and Australia. In the US, this is still allowed, but a ban is being discussed.
Since the forecast is made by exchange participants, it would be interesting to understand who they are — professional or non-professional investors. This is not really known. There are certainly professional forecasters, but whether they bet on the dynamics of the stock market is hard to say. It is difficult to predict, and the best models of funds and investment banks contain several hundred indicators. Most likely, this is a forecast by individuals.
Despite the fact that individuals do not dominate the stock market and do not significantly influence it, such a forecast is important. When an analyst makes a forecast, we do not know how sincere he is and whether his own money or the money of his fund/bank is at stake. Here, your voice is counted only if you placed a bet — just like on Booking.com, a hotel review can only be left by someone who stayed there. In other words, those who placed bets actually think that the market is almost inevitably more than 50% likely not to reach the level of 4,500. Naturally, this opinion will be reflected in the trading behavior of stock market participants. And even those who thought otherwise may change their opinion upon seeing the probabilities. In this sense, there is an element of self-fulfillment in such forecasts.
