How insider-trading fears harm prediction markets

LONDON, March 12 (Reuters Breakingviews) - Sites like Polymarket and Kalshi can, in theory, reveal the truth about the future. Yet they risk being undermined by those who already know it. Prediction markets have seen some eye-catchingly well-timed trades this year, including on the ousters of Iran’s Supreme Leader Ayatollah Ali Khamenei and Venezuelan President Nicolas Maduro. It has raised unsubstantiated concerns about insider trading by U.S. officials with knowledge of military ​strikes. True or not, the perception of a rigged market could put off users, slowing the platforms’ growth.

There are virtually no major public securities markets that allow insiders to trade on so-called material non-public information, ‌or MNPI. There’s a moral element to the rules, but the logic is also practical: people may not invest at all if they fear being steamrollered by clued-up insiders. It’s a version of what economists call adverse selection, opens new tab. If a trader thinks a counterparty might possess more valuable information than they do, it’s rational to do nothing, meaning that insider-dominated markets can collapse.

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The United States created, opens new tab the Securities and Exchange Commission (SEC) in 1934 to shore up public confidence following the 1929 crash. This meant policing fraud and standardising corporate disclosures. Penalties for insider trading became more stringent in both the ​U.S. and United Kingdom during the corporate dealmaking boom of the 1980s, following some high-profile scandals.

Even traditional gambling companies try to stop insider bets, which in practice means verifying customers’ identities and monitoring accounts for suspicious activity. Routine ​surveillance by licensed sportsbooks helped lead to a spate of recent FBI arrests involving a player and a former coach in the National Basketball Association, both of whom denied providing non-public information about ⁠upcoming games to allow criminal partners to set up bets.

The SEC’s insider-trading rules don’t apply to prediction markets, where users can bet on everything from who will win the soccer World Cup, opens new tab to whether Alexandria Ocasio-Cortez will be the next Democratic presidential nominee, opens new tab. But ​under U.S. law, so-called event contracts are classed as derivatives, opens new tab, which brings them under the purview, opens new tab of the Commodity Futures Trading Commission (CFTC). The CFTC expects platforms to “maintain audit trails, conduct surveillance, and enforce rules against prohibited practices”, including insider trading.

This applies to Kalshi’s markets, though ​Polymarket’s situation is more complicated. The group, run by founder Shayne Coplan, effectively has two separate products, opens new tab. The first is a wildly popular offshore version, which is theoretically off-limits, opens new tab to users in the U.S. and some other major markets. The second is a nascent, opens new tab American alternative that’s regulated by the CFTC. The latter, more compliance-focused product is still being rolled out.

The danger is that virtual private networks (VPNs) can help traders even in banned locations place bets on the global version of Polymarket, which is where one trader netted a roughly $400,000 profit through well-timed wagers on Maduro’s removal in January. The company has ​said that it complies with all applicable laws, and its terms of use, opens new tab also prohibit the use of VPNs.

Coplan and his firm have arguably shown an ambivalent attitude towards inside information. On Tuesday, Polymarket announced, opens new tab a partnership with Palantir Technologies (PLTR.O), opens new tab to establish controls aimed ​at preventing, identifying, and reporting suspicious activity in its sports markets.

Yet in a November 2025 TV interview, Coplan displayed a more libertarian streak. Responding to a question on inside information, the Polymarket founder said, opens new tab it was important to be “clear and stringent on where the line is drawn”, ‌but that it’s ⁠also “sort of an inevitability that this will happen, and there’s a lot of benefits from it.”

One school of thought is that the presence of informed insiders simply makes prices more accurate. This arguably fits with Coplan’s conception, opens new tab of the platform as a “global truth machine”. Imagine that a hypothetical White House insider knows about plans to hike tariffs on imports from Canada. They could profit from that information by purchasing “yes” contracts on the relevant market, opens new tab. That would move the price, showing a higher probability of steeper levies. The price change would, in theory, count as useful information for businesses that send goods across the border. They could even use the market to hedge the risk of higher duties.

Yet insiders need someone to trade with, and those counterparties might not show up if ​they’re just donating money to better-informed rivals. Prediction markets are ​essentially zero sum. The winners’ profit on a successful “yes” contract ⁠is roughly equal to the money lost by those who bet “no”, after subtracting trading costs. The most extreme danger, therefore, is that using prediction markets to hedge risks is like buying car insurance from someone who already knows whether the engine is going to fail: the price will be set in the insiders’ favour.

That’s a problem for some of the more expansive visions, opens new tab offered ​by industry advocates, including Jeff Yass, co-founder of trading giant Susquehanna International. He and others have argued that bigger institutions could use prediction markets to manage risks tied to specific ​events like geopolitical ructions. The bigger ⁠the fear of insider-dominated markets, however, the less likely that is to happen.

Granted, many specific markets are less vulnerable to non-public information, like where, opens new tab the S&P 500 Index of stocks will land by the end of March. And Coplan pointed out in an interview, opens new tab with the Wall Street Journal last year that suspected insiders are often quickly uncovered on social media site X, arguably meaning that users can simply avoid trading with them.

Still, it’s notable that Kalshi is making a public splash of banning, opens new tab insider trading and rooting out offenders. The platform barred an ⁠employee of popular ​YouTube streamer MrBeast for two years after he traded about $4,000 on markets related to the channel. Meanwhile the “participant agreement, opens new tab” for individuals hoping to use Polymarket’s ​new onshore regulated U.S. product appears to call for government issued identification, which could help with Kalshi-style combatting of insider trading. It might go against the movement’s libertarian zeal. But insider trading represents a key business risk at a time when both platforms are eyeing roughly $20 billion valuations, according, opens new tab to the Wall Street ​Journal. Clamping down, and keeping honest punters coming through the door, simply makes financial sense.

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Editing by Liam Proud; Production by Oliver Taslic

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Jennifer Johnson

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Jennifer Johnson is a London-based columnist for Breakingviews, where she covers the telecoms, media and retail sectors. She was previously a reporter for the Investors’ Chronicle and she holds a master’s degree in financial journalism from City, University of London.

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