What are the odds that prediction markets will impact compliance?
Here’s one sure bet for compliance officers this spring: your oversight of insider trading risk is about to get a lot more complicated, thanks to the rise of prediction markets.
Prediction markets, as you may have seen from the headlines recently, are online platforms that let just about anybody place bets on just about anything. For example, you can place a bet about whether a certain company will beat earnings expectations in its next quarterly report – and if you’re an employee at that company who already knows those earnings numbers, making that bet exposes you to insider trading enforcement.
That newfangled form of insider trading is bad enough, and one that warrants new policies, training, and monitoring of employee behavior. But consider prediction markets more deeply, and even more misconduct and compliance risks come into view.
Corporate compliance teams need to get ahead of those risks now, before employees start placing their bets and piling all sorts of headaches onto your plate.
Prediction markets 101
Let’s first review what prediction markets are and how they fit into the existing regulatory world. (Spoiler: they fit into it poorly.)
Prediction markets allow people to place bets on virtually anything: the outcome of sports events, the value of bitcoin next week, which celebrities will announce they’re pregnant, tomorrow’s weather in various cities around the world; the list is endless.
Some bets are legally questionable, such as bets on corporate earnings or political contests. Some are simply in bad taste, such as whether the world will suffer nuclear war by 2028.
Legally, all these bets are futures contracts. In the United States that means they’re regulated by the Commodities Futures Trading Commission, which just published a call for comment on possible regulation of prediction markets a few weeks ago.
The two largest and most well-known prediction markets are Kalshi and Polymarket. Both are headquartered in the United States, and both are registered with the CFTC as a “designated contract market.” (Polymarket had previously been exiled from U.S. markets in 2022, but returned in 2025.) Both markets allow customers to make bets in cash or cryptocurrency.
Other prediction markets exist around the world too, although some of them have more dubious credentials and guardrails.
Insider trading risk abounds
The obvious regulatory risk from prediction markets is insider trading. That is, an executive at your company might know material, non-public information about the business – say, whether the company will beat earnings expectations this quarter or whether the CEO is about to resign abruptly – and then place bets through Kalshi or Polymarket on that event. The event happens in the executive’s favor and then they pocket the money.
That’s not “traditional” insider trading, where the offending executive sells shares of the company in advance of important news that’s about to break – but it is insider trading. Both the CFTC and the U.S. Justice Department have expressly said so. For example, on March 31, the director of enforcement at the CFTC declared: “Insider trading is illegal under the [Commodity Exchange Act] and our regulations in all our markets – including the prediction markets.” The U.S. attorney for New York, Jay Clayton, recently said that he expects to bring insider trading cases involving the prediction markets as early as this year.
So right off the bat, compliance and legal teams need to be sure your insider trading policies, procedures and training extend to the prediction markets as well.
The precise language and revisions you’d want to adopt are up to you and your legal counsel, of course. Conceptually, however, the goal is to remind employees that they have a duty to the company to protect the confidential information they know. David Miller, the CFTC enforcement director, even said as much in his March 31 speech:
“Our insider trading authority is about the misappropriation of material non-public information – and thus involves the use of information in violation of a duty owed to the source of that information.”
But here’s where things get messy: prediction markets allow anyone to make money from any information they know. So employees will be able to “monetize” any information they know about the business – and essentially, create their own insider trading risk.
Brace for new types of misconduct
For example, imagine your company plans to announce quarterly earnings at 4 pm on Tuesday. A mid-level IT manager then places a bet on the prediction markets that your company will miss that deadline, orchestrates a system crash at 3:45 pm, and pockets a bundle.
Lawyers can debate whether that’s insider trading, but go back to Miller’s words above: “the use of information in violation of a duty owed” to the company. Our IT manager put his own financial interests above his duty (to keep the IT systems running) to the company. Even if that’s not a violation of insider trading law, it’s certainly an unethical breach of the duty he owes his employer.
One can see that this is a slippery slope leading nowhere good. Employees will be able to use the inside information they have to bend corporate operations in certain ways, and then place bets on the prediction markets to profit from that behavior.
That’s the emerging risk that should worry compliance officers here. It could spill into insider trading enforcement, which would be a costly distraction to your company (and your budget); but even if prosecutors never bother to pursue insider trading cases for scenarios like this, there’s still a real risk of erosion to the company’s ethical culture.
So, compliance, HR, security, and other Second Line risk oversight leaders will need to think about this. You may need to expand the number of employees who receive training on insider information, or update the training they receive. You’ll need to monitor employee behavior more closely, and be ready to investigate any time something unusual happens that could be a betting opportunity for unethical employees.
Insider trading will no longer be an issue for a select number of senior leaders who know material non-public information; it will be an issue for anyone who might be tempted to make a quick buck on the side by betting on how your business works.
That will do no ethical culture any good, and compliance officers can be 100 percent certain on that.
Predictable policy and procedure management
One of the key elements to managing this risk is proper policy and procedure documentation.
