As Prediction Markets Grow in Popularity, Some Fear ‘Insider Trading.’ What’s Next?

Someone profited handsomely after winning an unlikely short-term bet on Nicolás Maduro’s fate. The win kicked off a round of intense scrutiny of prediction markets.

How, the questions went, could they have known what would happen in Venezuela with such confidence? If they did know, did that amount to market manipulation? And if it did, how many more winners were trading on confidential information for their own gain?

That paranoia—or, more charitably, the curiosity—appears to be percolating. On social media, skeptics routinely peruse wagers and wonder aloud whether they might constitute something like “insider trading,” a term generally used for the illegal practice of buying or selling securities using privileged information. Legislators have also expressed interest in learning more.

So is something amiss on prediction markets, one of the fastest-growing segments of trader enthusiasm and activity? If it is, what should be done? The short answer: It’s complicated.

The question of who should regulate prediction markets—and how it would be best done—remains unsettled in the U.S., with lobbying activity and legal battles still picking up. Within the range of opinions is even a theory that insider activity might shore up trust and accuracy, contrasting conventional market wisdom that integrity should be protected. Social media users are far from unanimous, with some calling prediction markets “a cesspool of insider trading” and others saying “Calling insider trading a ‘problem’ in prediction markets misses the point.”

Though the specific Maduro bet mentioned above was placed on Polymarket’s offshore venue—and thus perhaps beyond the reach of U.S. regulation—some have openly questioned its legitimacy. A dozen senators earlier this month sent a letter to the Commodity Futures Trading Commission’s chair Mike Selig asking about wagers associated with the event as brought to light by The Wall Street Journal and wondering what the agency was doing to make sure prediction markets were following the rules.

CEOs of prediction markets say they’re not running amok. Tarek Mansour, co-founder and chief of Kalshi, wrote in a social media post after Maduro’s ouster that “Insider trading is banned on Kalshi (and always has been).”

The CFTC is the primary regulator of prediction markets, including Kalshi and Polymarket, because event contracts are categorized as financial derivatives. (In the context of traditional “insider trading,” the “Eddie Murphy rule” aimed at preventing the misappropriation of confidential information for unfair gain—named for the actor in the movie Trading Places—would apply.)

But policing a new market is hard when existing rules weren’t designed with it in mind, and the array of contracts tied to everything from geopolitical events to sports and award ceremonies makes matters even more complex.

The CFTC can shut down contract categories—terrorism, war and gaming—that it deems “contrary to the public interest,” according to Andrew Kim, a partner at law firm Goodwin Procter. But there is a debate around what “gaming,” in particular, means, Kim told Investopedia.

The CFTC during the Biden administration forced Polymarket offshore in 2022. In 2024 it proposed a rule that aimed to define what “gaming” meant as it pertains to event contracts. That proposal hasn’t gone anywhere.

Under the current Trump administration, Polymarket has relaunched in the U.S. It, along with other prediction markets, have in the past year or so begun offering sports-related event contracts. That’s when state gambling regulators got involved, arguing in courts that contracts tied to sports games are unlicensed wagers and thus that prediction markets should be under their authority.

Prediction markets say their contracts are federally regulated, an issue that the Supreme Court may ultimately settle. Selig, meanwhile, recently launched a committee to “gather expertise and recommendations on innovation in financial markets;” his planned nominations include Polymarket chief Shayne Coplan, Mansour, and leaders of derivatives and crypto exchanges.

Prediction market operators appear to be trying to get ahead of the next round of rulemaking. Crypto.com, Coinbase (COIN), Kalshi and Robinhood (HOOD) last month formed the Coalition for Prediction Markets to establish “guardrails that prevent insider trading and ensure all participants operate on equal footing” and “defend against state-level overreach.”

Then there’s the debate about whether insider action on prediction markets might be good. If the masses look to prediction markets for information—odds on some contracts are already visible on CNN—insider bets, the argument goes, might bolster their accuracy.

Coinbase Global (COIN) chief Brian Armstrong said last month that deciding whether insider trading should be allowed in prediction markets depends on what use they serve: If prediction markets are meant to be a type of oracle, “you want insider trading” for the “higher quality signal, but if the goal was to “preserve the integrity of those markets,” it shouldn’t exist. Coinbase last month announced its own predictions market.

“Part of the growing pains of this industry is going to be figuring out issues like ‘insider trading”‘and striking a balance—providing the signaling function that they were intended to do, while also ensuring that customers are protected from market manipulation and abuse,” Kim said.