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By Niket Nishant

March 18 (Reuters) - Event contracts have exploded in popularity since the U.S.

presidential election, fueling a heated debate between traders who have embraced the nascent

asset class and critics who liken it to gambling.

Several market players such as retail-favorite Robinhood and Interactive Brokers ( IBKR )

have rolled out event contracts in recent months, looking to cash in on the boom.

Robinhood on Monday also launched a standalone hub on its app to allow traders to wager on

college basketball and U.S. interest rates.

Here is how event contracts are shaping up as a new asset class:

WHAT ARE EVENT CONTRACTS?

Event contracts allow traders to bet on specific outcomes, offering opportunities to profit

from predictions on everything from sports and entertainment to politics and the economy.

Users can speculate on the likelihood of a movie surpassing a certain Rotten Tomatoes score,

the probability of the U.S. entering a recession this year, or the possibility of bitcoin's

price breaching a new milestone.

When event contracts became more popular ahead of the U.S. presidential election, Elon Musk

said on X that prediction markets were "more accurate than polls, as actual money is on the

line."

HOW DO THEY WORK?

Unlike gambling, where bets are placed against the house, event contracts function as a

marketplace between traders.

Such contracts typically pay out $1 if the event occurs. Their prices fluctuate depending on

the likelihood of the underlying outcome.

WHY ARE EVENT CONTRACTS MAKING HEADLINES?

While proponents of event contracts see them as a new avenue for traders, their road to

legitimacy has been fraught with challenges.

In 2023, the U.S. Commodity Futures Trading Commission rejected a proposal by prediction

marketplace KalshiEX to permit trading of political event contracts tied to Congressional

control, saying they involved unlawful gaming and were "contrary to the public interest."

Kalshi sued, and was cleared to resume trading these contracts in October. The ruling also

encouraged others waiting to dip their toes into the sector.

Still, concerns remained. In a January interview with the Financial Times, former CFTC Chair

Rostin Behnam said he was concerned about the legality and social impact of bets on political

and other events.

Robinhood was also forced to roll back its Super Bowl event contracts in February, just a

day after the launch, following a request from the CFTC.

WHAT'S NEXT?

The rise of event contracts reflects the trend of "democratization" in financial markets as

firms seek to attract retail investors. An anticipated wave of deregulation under President

Donald Trump may help companies facilitating these trades.

CFTC Acting Chair Caroline Pham's pledge to end "regulation by enforcement" could also

foster a more collaborative environment.

Critics, however, still voice concerns.

"These contracts are a backdoor attempt to bring gambling into financial markets," said

Cantrell Dumas, director of derivatives policy at Better Markets, a group that advocates

stricter oversight of the financial sector.

"Expanding the CFTC's role into gambling would stretch its limited resources and divert it

from its core mission of overseeing legitimate derivatives markets."

Russ Mould, investment director at AJ Bell, likened the contracts to other speculative

investment vehicles, such as leveraged exchange-traded funds.

"Investors should never mistake a bull market for brains and the risk remains that

confidence leads to overconfidence," he said.