The growing popularity of a combo contracts on prediction markets is leading to soaring volumes, even as they makes up only a small amount of total activity on the platforms.
Combos, or multiple contracts stacked together that only pay out if all of them win — similar to parlays on traditional sportsbooks — have exploded in popularity.
Last month, combos accounted for more than 50% of notional volume on Kalshi, driven by the start of the NFL season. Combos are overwhelmingly made up of combinations of multiple sports contracts.
As rival Polymarket worked to expand its U.S. exchange this year, combos were a priority following the domestic platform's official launch in May. Combos are now nearly 50% of daily volume on Polymarket U.S., helped by growth during the NFL season.
Large share of volume
But while combos hold a large share of volume, they actually aren't where most speculators on prediction markets execute their trades. That's because of how the Commodity Futures Trading Commission, the federal regulator overseeing prediction markets, requires exchanges to report volume.
The multi-leg contracts are "helping [Polymarket and Kalshi] claim a higher number with lower realistic cash output," said Chris Park, a researcher and founder of MSR Decode, a research firm analyzing prediction market data.
When a trader places a trade on a prediction market, no matter the cash they put down, platforms measure it as $1 of notional volume. All event contracts have binary outcomes between $0 to $1, and no matter what price a speculator pays to place a trade, someone has to take the other side of that order and make $1 in total volume.
But combos can have payouts that are much greater than $1, meaning someone can put very little money down, pennies in some cases, and it will be measured as potentially thousands of dollars in volume thanks to the market makers who take the other side of these high-payout trades.
A CNBC analysis for trades on Kalshi on Sept. 27 showed this in practice. On single contracts, the average amount of cash placed on a trade was less than 47 cents. But on combo contracts, that average per contract was about 9 cents.
Similarly, while combos comprised 58% of Kalshi's trading volume in September, they made up less than 13% of the total transactions on the platform, according to data on Dune.
Other than sports, combos trump other categories for notional volume on Kalshi, with over 35% total volume share.
Details on how combos are measured is not always clear to the public, but their effect on total headline volume numbers can make platforms look as though they're growing faster than they are.
The rising popularity of prediction markets' sports-related event contracts has hurt traditional online sportsbooks — including FanDuel parent Flutter Entertainment, and DraftKings — whose stocks have plunged 70% and 45%, respectively, over the past year.
Apples and oranges
But some note that investors may be confusing activity numbers that aren't exactly comparable.
"I have spoken to investors who see the notional number and compare it to [the] handle in sports betting, and then make the argument that. you know, these prediction markets have already exceeded [the] scale of sports betting," said Ian Moore, an analyst at Bernstein.
A "handle" in a sportsbook measures the total dollar amount wagered, while prediction markets count both sides of a trade.
"When a client buys a deep out-of-the-money contract or a combo, prediction markets may have dollar volumes anywhere between 20 to 100 times greater than sportsbooks because CFTC reporting requires one thing and sportsbooks report the same activity differently," said Rich Jaycobs, an independent advisor to prediction markets seeking regulatory approval from the CFTC. "Same basic bet, same basic idea, but you're getting a completely different perception of activity."
Kalshi said its notional volume doesn't overstate activity. "If people are more interested in other measurements, they can look at other metrics," said spokesperson Jack Such.
While notional volume is the standard metric for prediction markets, some have suggested looking instead at taker volume as a better measurement. That's because "takers" scoop up liquidity from market makers, rather than provide it, and thus can be a better yardstick of where activity is on exchanges.
Polymarket agrees with that approach.
"We really like to look at taker volume in terms of buying yes on combos," said Kyle Gesuelli, the company's head of revenue and analytics. That measures trader demand for bets where the all the combined outcomes turn true. "That feels like a better measure for us to just truly understand the underlying activity."
Disclosure: CNBC and Kalshi have a commercial relationship that includes customer acquisition and a minority investment.
