How Prediction Markets Work: The Infrastructure Stack Behind Kalshi, Polymarket and EDGE Markets

Exchanges get the headlines, but a prediction-market trade depends on six other layers. Here is how they fit together, and where the gaps are.

Ask most people how a prediction market works and they will describe an app: pick an outcome, buy a contract, wait for resolution. Ask a compliance officer, a market maker or a treasury lead and you get a far more crowded picture. The trade passes through an exchange, a clearinghouse, often a broker, a liquidity provider, sometimes a routing layer, and at both ends a banking system that was not built for markets that never close.

As institutional money enters the category, those layers matter more than any single venue. Who holds customer funds? Who guarantees that a winning contract pays? Who is licensed for what? Where does capital sit when it is not deployed? This guide maps the U.S. prediction-market stack layer by layer, using public filings and reporting as of October 2026.

Layer 1: The prediction market exchange (Designated Contract Market)

In the United States, regulated event contracts trade on a Designated Contract Market (DCM), an exchange the Commodity Futures Trading Commission has authorized to list derivatives. The DCM writes the contract terms, runs the order book, sets position rules and monitors trading.

The roster has grown quickly. DeFi Rate's March 2026 survey counted 20 new DCM filings or designations since the start of 2025: seven newly designated and 13 still pending with the CFTC. Exchanges active at the time included KalshiEX, Polymarket's U.S. exchange (formerly QCX), Crypto.com's CDNA, CME Group, Railbird (acquired by DraftKings), Aristotle (acquired by Underdog), MIAXdx (a Robinhood–Susquehanna joint venture now operating as Rothera) and Interactive Brokers' ForecastEx.

That is also the short answer to how Kalshi works: KalshiEX lists the contract and runs the order book, its clearing arm guarantees settlement, and customer money reaches it either directly or through a broker. Each of those steps is a separate layer below.

What to know: the exchange license has become strategic in its own right. Several of the largest operators bought one rather than wait for approval. In DeFi Rate's words, "exchange licenses themselves are becoming valuable entry points into the market."

Layer 2: The clearinghouse and how prediction market settlement works

Behind each exchange sits a Derivatives Clearing Organization (DCO), which stands between buyers and sellers, holds collateral and guarantees settlement when a contract resolves. Some operators run their own. Kalshi's clearing arm is Kalshi Klear. Others clear through a third party.

The defining feature of U.S. event-contract clearing today is full collateralization. A trader posts enough to cover the maximum possible loss on a position before it is opened. A YES contract bought at 25 cents requires 25 cents. The NO side of the same trade requires 75. That design keeps default risk close to zero, but it is capital-intensive for anyone holding large or two-sided positions.

That may be starting to change. Kalshi has filed to let FCMs and approved self-clearing members post risk-based margin on some non-sports contracts, a proposal now under CFTC review.

Layer 3: FCM vs. introducing broker: the intermediaries

Not every trader connects to an exchange directly. Two types of CFTC-registered intermediaries, overseen by the National Futures Association, sit in between:

Futures Commission Merchant (FCM): accepts customer orders and holds customer funds or collateral. FCMs can clear trades and extend the institutional services that hedge funds and trading firms expect. In prediction markets, DeFi Rate lists FCMs including Robinhood Derivatives, Coinbase Financial Markets, Webull and Interactive Brokers. In May, Clear Street became the first institutional FCM to join Kalshi's exchange and clearinghouse, according to Markets Media.

Introducing Broker (IB): solicits and accepts orders but does not hold customer money. Funds sit with a carrying FCM. Fanatics, for example, acquired Paragon Global Markets in 2025 to obtain its IB registration, DeFi Rate reported.

What to know: the FCM layer is where retail distribution and institutional access meet. It is also the layer that determines whether a trading firm can use the margin, financing and reporting tools it relies on in other asset classes.

Layer 4: Prediction market makers and liquidity providers

A contract is only as useful as its order book. Professional market makers quote both sides, tighten spreads and absorb flow. In 2026 that group has filled out quickly. Jump Trading, Susquehanna and Galaxy Digital were active before Wintermute began quoting on Kalshi and Polymarket this spring, Finance Magnates reported. Galaxy and BitGo, the latter in partnership with Susquehanna Crypto, have added institutional OTC channels for block-sized trades, according to Markets Media.

What to know: market makers carry the capital burden of full collateralization most directly. They have to keep funded balances at every venue they quote on. That makes them the first participants to feel fragmentation, and the most motivated to fix it.

Layer 5: Execution, routing and prediction market platforms

As venues multiply, a layer has emerged that helps traders find the best price across them. Execution platforms such as ParlayX and River Markets route orders across exchanges. Data and comparison layers such as Genius Sports' Prediction.com, launched in September according to Shift Markets, show prices side by side.

Routing solves the information problem. It does not solve the capital problem. ParlayX founder and CEO Andrew Gonzalez put it plainly when his company announced a partnership with an infrastructure provider in October: "ParlayX handles everything that happens once capital reaches the venue, but not the movement of the capital itself."

Layer 6: Prediction market payments and the capital-movement layer

This is the least visible layer and arguably the one under the most strain. It covers how money gets from a trader's bank, treasury or crypto holdings into an exchange account, and back out.

The traditional options each carry a constraint. ACH is cheap but runs on business days and can take one to two days to settle. Wires are the default for large sums, but Fedwire is closed on weekends and federal holidays. Cards carry consumer-style fees and low limits. Instant payment networks run around the clock, but only between institutions that both participate, and at whatever limits each sets. Crypto on-ramps convert digital assets to dollars through licensed providers, adding a conversion and custody step.

A newer group of firms builds specifically for event-contract flows. EDGE Markets is one example. Its products map neatly onto this layer: EDGE Boost, a limited-use special purpose debit account and Visa debit card that lets traders fund several venues from a single balance; EDGE Connect, the company's real-time capital-movement rail into connected venues; and EDGE Pro, a forthcoming institutional product. Execution partners including ParlayX, River Markets, OpenMarkets.ai and Pikkit plan to integrate through EDGE's APIs, a division of labor ParlayX's Gonzalez described when the partnership was announced in October. "EDGE Markets handles the movement of capital, but its role ends once the funds arrive," Gonzalez said. "Each product makes the other more useful."

What to know: this layer decides how much capital has to sit idle across venues. As exchanges multiply, that number grows unless capital can move continuously.

Layer 7: How Kalshi and other prediction markets are regulated

The CFTC oversees DCMs, DCOs and intermediaries. The NFA registers and supervises FCMs and IBs. Banks and payment providers answer to their own regulators and to FinCEN on anti-money-laundering obligations. The perimeter is still being drawn. The CFTC proposed a rule in June on public-interest determinations for event contracts and another on October 9 that would broaden the definition of swaps, Bloomberg reported. State-level litigation is ongoing. Anyone building on this stack should treat the regulatory map as live.

Prediction market infrastructure at a glance

Layer	Role	Holds customer funds?	Examples (public reporting)
1. Exchange (DCM)	Lists contracts, runs the order book	Varies by model	KalshiEX, Polymarket US, CME, CDNA, ForecastEx
2. Clearinghouse (DCO)	Guarantees settlement, holds collateral	Yes (collateral)	Kalshi Klear; third-party DCOs
3a. FCM	Accepts orders and holds customer funds; clears	Yes	Robinhood Derivatives, Coinbase Financial Markets, Interactive Brokers, Clear Street
3b. Introducing broker	Accepts orders; funds held by an FCM	No	Paragon Global Markets (Fanatics)
4. Market makers	Quote two-sided liquidity	Own capital	Jump, Susquehanna, Galaxy, Wintermute
5. Execution and routing	Route orders to the best price across venues	Generally no	ParlayX, River Markets, Prediction.com
6a. Traditional rails	Move money between banks and venues	Banks hold deposits	ACH, Fedwire, instant payment networks, card networks
6b. Purpose-built capital movement	Move capital into and between regulated venues	Varies	Specialized providers (e.g. EDGE Markets); licensed crypto on-ramps
7. Oversight	Registration, rules, surveillance	—	CFTC, NFA, FinCEN, bank regulators

Where prediction market infrastructure is thinnest

Mapped this way, the category's growing pains become easier to place. Exchanges are plentiful and getting more so. Market makers are arriving. Routing is maturing. The weak points sit lower in the stack: collateral regimes designed for small positions, and capital rails that close on Friday evening while the contracts keep trading.

That is why so much of 2026's institutional activity, from Kalshi's margin filing to new FCM memberships to programmable funding tools, has focused on the bottom of the stack rather than the top. The next phase of prediction markets will be shaped less by who lists the most contracts than by how efficiently capital can reach them.

Prediction market terminology: a short glossary

• Event contract: A derivative that pays out based on whether a specified event occurs, typically settling at $1 or $0.
• DCM (Designated Contract Market): A CFTC-designated exchange authorized to list futures, options and event contracts.
• DCO (Derivatives Clearing Organization): A CFTC-registered clearinghouse that guarantees settlement and manages collateral.
• FCM (Futures Commission Merchant): An intermediary that accepts orders and holds customer funds for derivatives trading.
• IB (Introducing Broker): An intermediary that accepts orders but does not hold customer funds.
• Full collateralization: Posting the maximum possible loss on a position up front.
• Risk-based margin: Collateral sized to an estimate of likely price movement rather than the maximum possible loss.
• Pre-funding: Depositing capital at each venue in advance so it is available to trade.