Small Businesses Tap Prediction Markets to Shield Profits From Surprise Costs

A handful of small businesses have begun using prediction market platforms to hedge risks, Reuters reported Friday (Aug. 28).

Companies of this size can’t get help from Wall Street banks in hedging risks that in some cases could kill their business, according to the report.

Some small businesses have turned to prediction markets for event contracts that would limit the financial impact of unexpected events, the report said.

Examples include a goat herding firm that aimed to manage the risk that its labor costs could soar if a gap in a state labor law isn’t fixed; a bar that wanted to manage the risk that its profits could be lowered by its promotion that offered refunds if the local basketball team won a game; and a tea company that sought a contract that would help cover a potential surge in freight costs.

The contract for the goat herding firm was created by a collaboration of Susquehanna International Group, finance startup Castle Technologies and prediction market Kalshi, per the report.

Eric Passmore, a senior trader at Susquehanna International Group, said in the report: “Hedging is not a well-known way to use event contracts yet, but my job is to build out one-off hedging solutions and hedge risks that would previously have been unhedgeable.”

The founders of Castle said in an Aug. 10 blog post that clients have sought solutions to risks that include potential tariff swings, tax credit removals and court rulings.

“We have already built relationships with the largest traders on prediction markets, and sourcing capacity for our customers is not a constraint,” they said. “We set up infrastructure to further streamline our quoting workflows, compressing the time from request to print.”

PYMNTS reported in January that prediction markets are breaking into the mainstream and drawing interest from crypto, betting, finance and major institutions despite regulatory risk.

In July, PYMNTS reported that prediction markets are betting on growth across new financial products. The industry’s product menu already includes topics as varied as political elections, World Cup matches, weather events and reality television. Now, the event contract services business is evolving from predicting discrete events to trading continuous exposure to economically important assets, the report said.