How Prediction Markets Got Their Start in 19th-Century America

Prediction markets might seem like a distinctly modern invention, but as early as the 19th century, new communications technology and a growing appetite for speculation were already giving rise to systems for betting on the future.

On the evening of December 15, 1887, Chicago Board of Trade President Abner Wright noticed electrical cables snaking out from the exchange building’s basement. Believing they were telegraph cables for stock tickers, he ordered them cut with an axe. This wasn’t Wright’s first such outburst; just a few months earlier, he had thrown ticker equipment belonging to several telegraph companies out into the street.

In just two decades, the stock ticker—a telegraphic machine that printed near real-time price quotes—had revolutionized finance. For the first time, market data could travel instantly. As an unintended consequence, it also extended market speculation to the masses, allowing ordinary people to wager on short-term price movements in stocks without actually owning the underlying shares.

Equipped with their own stock tickers, betting parlors known as "bucket shops" emerged in the late 1870s as informal proxies for the stock market. By the time Wright took aim at the exchange building’s telegraphic connections, these establishments numbered in the hundreds across the United States. 

The fight against bucket shops would ultimately define the difference between speculation and gambling in the U.S. It would also pave the way for the online prediction markets of today, where traders wager on everything from elections to inflation. 

Western Union telegrapher Edward A. Calahan invented the ticker in 1867. The low-cost, low-maintenance receiver printed information sent by telegraph onto paper strips, or 'ticker tape," in real time. Its first customers were brokers and bankers, who used ticker technology to remotely track changes in stock price as they unfolded on the trading floor. The stock ticker eliminated the need to wait for intermittent price updates by messenger or mail, allowing anyone with the equipment to follow the market’s every move. 

Real-time tracking also made market speculation a lot more exciting. It wasn’t long before Western Union sought to commercialize ticker technology, says David Hochfelder, an assistant professor of history at SUNY Albany and author of The Telegraph in America, 1832-1920. The company rented its equipment to saloons and gambling venues, where enterprising bookmakers sold wagers on the prices of stocks and commodities.

What became known as bucket shops effectively functioned as shadow markets, where customers bet on financial market movements instead of buying shares. The derisive nickname is believed to have come from the slums of early 19th-century London where, “legend has it, street urchins would go around to pubs at the end of the night and drain the dregs of beer kegs into buckets,” Hochfelder says. The children would then bring their buckets of leftover beer to unlicensed saloons, that proceeded to sell the contents.

Despite their seedy connotations—and often unsavory practices—bucket shops were wildly popular. In Reading the Market, historian Peter Knight writes that by 1889, “bucket shop clients were estimated to be betting on the equivalent of 1 million shares per day, seven times the volume traded on the New York Stock Exchange.” Many of these clients, Knight explains, were “keen to enjoy the fruits of speculation that they felt were being unfairly hogged by the ‘insiders’ on the nation’s exchanges.” In lieu of real access, bucket shops offered ordinary people a simulation of financial trading. 

Bucket shops could be “considered akin to” the prediction markets of today, with some important distinctions, says Benjamin Schiffrin, director of securities policy for the advocacy group Better Markets. Like contemporary prediction market platforms such as Polymarket and Kalshi, bucket shops leveraged telecommunications technology and real-time data to make financial markets more accessible to amateur investors. They also, in similar fashion, narrowed the distance between investing and gambling in the public imagination. 

The key difference is that prediction markets deal in financial instruments called “event contracts,” yes-or-no questions about the outcomes of future events. These contracts are officially recognized and regulated by the Commodity Futures Trading Commission (CFTC), the U.S. agency that oversees derivatives markets, such as futures trading exchanges where people trade contracts tied to future events.

Bucket shops, in contrast, were always understood to be betting parlors. That distinction was cemented in a 1905 Supreme Court decision, which drew a clear legal line between regulated trading and outright gambling. It also marked a victory for the Chicago Board of Trade in its longstanding fight against illicit market betting.

In Board of Trade v. Christie Grain & Stock Co., the Chicago Board of Trade argued that the Christie Grain and Stock Company, a prominent bucket shop, was not authorized to use its commodities price data for selling wagers and that doing so was tantamount to stealing trade secrets. Christie Grain countered that the Board of Trade effectively functioned as an illegal bucket shop in its own right under Illinois state law, which prohibited the “pretended buying of” commodities.

The Court ultimately ​​ruled in the Board of Trade’s favor. In his decision, Justice Oliver Wendell Holmes argued that speculative futures contracts—buying and selling contracts that lock in the price of something at a set date in the future—provided market stability. This codified futures trading as legitimate financial transactions. Beyond marking a victory for the Chicago Board of Trade in its longstanding fight against illicit market betting, the case established parameters for the eventual federal regulation of derivatives and informed the later establishment of the CFTC and companies under its jurisdiction.