Jefferies: SCOTUS Could Take Up Prediction Markets Fight Between November and April

Following opposing rulings on prediction markets by the Third and Ninth Circuit Courts of Appeals, consensus is growing among legal experts and Wall Street analysts that a U.S. Supreme Court review is now inevitable.

At least one analyst is offering up a timeline on when that will occur. In a new report to clients, Jefferies analyst David Katz says the diverging rulings by the Third and Ninth Circuit courts “suggest a path to SCOTUS between November and April next year.”

In April, the Third Circuit ruled that all event contracts are classified as swaps and thus fall under the regulatory purview of the Commodity Futures Trading Commission (CFTC), which oversees prediction markets.

More recently, the Ninth Circuit ruled sports event contracts are not swaps subject to CFTC regulation.

Following the Ninth Circuit decision, New Jersey—which falls under the Third Circuit—is pushing the Supreme Court to take up the matter.

“We’re calling on the Supreme Court to resolve this issue and recognize that Congress did not silently make the sports-betting industry immune from state law,” said New Jersey Attorney General Jennifer Davenport (D) in a statement.

Prediction Markets Unlikely to Be Banned, But…

It’s widely expected that the high court will, at some point, take up a prediction market case, prompting plenty of speculation regarding best- and worst-case outcomes.

Katz notes the biggest risk to prediction operators isn’t “outright prohibition,” but the result could entail various factors the industry is seeking to avoid.

Conventional wisdom in the legal community indicates that prediction market operators are leaning on federal regulation because they want to avoid the hodgepodge of state-level regulatory and tax schemes with which sportsbook operators contend.

Clarity Could Help Gaming Stocks

As is the case with some of his colleagues, Katz is of the mind that loss of legal ambiguity as it relates to prediction markets could be beneficial to select gaming stocks.

“Ultimately, we view any legal clarity as positive for our coverage vs. current uncertainties,” wrote the analyst in the report.

Separate from the Supreme Court chatter, Katz points out that vertical integration is becoming increasingly important in the prediction market industry due to low fee yields.

It’s a model being embraced by Crypto.com, DraftKings (NASDAQ: DKNG), FanDuel owner Flutter Entertainment (NYSE: FLUT) and Robinhood Markets (NASDAQ: HOOD), among others.

“We note that fee yields remain low, with exchange economics generally clustering around a fraction of a percent of traded volume,” Katz notes.

“We estimate DKeX (DKNG) has generated ~$5 million in taker fees on roughly $84 million of volume since inception in mid-June, which suggests heavy dependence on maintaining large-scale liquidity and event-based participation which is similar to online sports betting business models,” the analyst concludes.

Ultimately, establishing regulatory clarity should remove a lingering overhang for both gaming operators and prediction platforms—paving the way for more predictable monetization models.