Investors who like the binary bets on Kalshi and Polymarket but without the all-or-nothing risk are being offered an unlikely new asset: a bond-like note tied to prediction market outcomes.
London-based Marex Group Plc created and sold the first instance of this new kind of security, which will pay out a 7% coupon if Nvidia Corp. is still the world’s largest company in a year.
The issuance is the latest sign of how Wall Street firms are trying to harness the fast-evolving energy of prediction markets, which have so far attracted interest primarily from small retail traders.
Prediction market exchanges like Kalshi and Polymarket make it possible to bet on binary outcomes in sports and politics, but also in the financial markets. This week, a contract on Polymarket gave Nvidia a roughly 80% chance of being the biggest company in the world at the end of June. While that seems like a relatively sure investment, if Nvidia loses its top spot, a person who bought the contract would lose everything they put in.
Wrapping an event into a structured product can flip that dynamic on its head, because the initial capital can be protected. While the upside is much more limited, so is the downside. The primary, but relatively small risk to the original capital is that investment-grade rated Marex goes out of business in the meantime.
Marex was able to create the note because prediction markets like Kalshi offer it a place to hedge its risks as the odds move over time. As a non-bank structured notes provider, Marex doesn’t take market risk with its issuance and fully hedges itself using derivatives.
“Marex is going to effectively build our own prediction market structured products, and then leverage Kalshi and other exchanges to replicate that,” said Nilesh Jethwa, chief executive of Marex Solutions, a unit of Marex.
Marex declined to name the Swiss client who purchased the structured note, which it said had an issuance size of up to $10 million. For regulatory reasons, such notes are only available for purchase outside of the US.
Robert Romano, head of structured products Americas at TP ICAP Group Plc, said in a phone interview that the product was the first such issuance he had come across.
The issuance “could be the first of many,” he said, adding that structured products based on prediction markets “could be used to hedge tail risk, or tail events.”
Binary instruments are already available in the world of structured products, with many offering investors a way to bet on market indicators hitting a pre-defined target. What prediction markets add is the ability to link those payoffs to real-world events — like whether Nvidia remains the world’s most valuable company — rather than just the price of an asset.
“The value in prediction markets is to provide a clean link between a client’s view and the outcome of that view – we think that’s quite compelling when added to the convenience of a structured product,” Jethwa said.
Marex and other Wall Street firms could use similar techniques to unlock other financial products tied to prediction markets.
In February, Roundhill Investments filed with the Securities and Exchange Commission for permission to launch six exchange-traded funds to track the outcome US elections, a popular topic for wagering on Kalshi and Polymarket.
ETF providers often enter into swap agreements with dealers to help them track certain financial outcomes. If granted regulatory approvals, Marex will look to offer swaps on a range of outcomes, including election results, that the ETF providers can then use to allocate their funds, according to Ram Vittal, CEO of the Americas at Marex.
Written by: Bernard Goyder @Bloomberg
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