In the rapidly evolving world of prediction markets, concerns over insider trading are mounting as platforms like Kalshi and Polymarket gain popularity for betting on everything from elections to geopolitical events. The Commodity Futures Trading Commission (CFTC), tasked with regulating these markets, asserts its authority to police illegal trading practices, but critics argue the agency lacks the resources and track record to effectively do so. Recent actions by Kalshi, including fines against a politician and a YouTube influencer employee, highlight the gaps in oversight, raising questions about whether self-regulation by exchanges can fill the void left by federal enforcers.
Kalshi, a U.S.-based prediction market platform, announced fines for insider trading violations earlier this year, targeting individuals who allegedly used non-public information to place bets. According to the exchange, these cases involved a politician and an employee of YouTube star MrBeast, though specific names were not disclosed in public statements. Kalshi reported opening 200 investigations into suspicious activity, freezing accounts, and escalating a dozen cases to active enforcement. 'The volume of suspicious activity we see is significantly higher than what any platform publicly acknowledges,' said Trevor I. Lasn, creator of the 0xInsider dashboard, which tracks potential insider trades on Kalshi and its competitor Polymarket.
The CFTC responded to Kalshi's announcement with a statement emphasizing its regulatory power: 'While Kalshi’s internal enforcement program handled these matters, under the Act, the Commission has full authority to police illegal trading practices.' However, the agency's enforcement capabilities appear strained. As of 2025, the CFTC had about 120 staffers dedicated to enforcement, down from 160 full-time employees in 2024, with a proposed budget supporting only 114 in 2026. This reduction comes as the agency oversees not just prediction markets but also agricultural futures, stock futures, and potentially parts of the cryptocurrency sector.
Insider trading prohibitions in commodity markets, including prediction markets, are a relatively recent development. Prior to the Dodd-Frank Act of 2010, such bans applied only to CFTC staff and exchange employees. The act expanded the rules, modeling them after the Securities and Exchange Commission's (SEC) framework. Yet enforcement remains sparse. 'At least some of the insider trading that we dislike in stocks and bonds is illegal in commodities markets, including prediction markets,' said Andrew Verstein, faculty co-director of the Lowell Milken Institute for Business Law and Policy at UCLA. 'But the intensity of enforcement is way different.'
To date, the CFTC has pursued only a handful of insider trading cases under the new rules. In simultaneous settlements, the agency addressed violations by gas trader Arya Motazedi and oil trader Jon Ruggles. A third case involved natural gas trader Matthew Clark, who allegedly shared his employer's trading plans with a friend, leading to profitable trades and a guilty plea in a related criminal proceeding. Verstein noted the scarcity of vigorous prosecutions: 'The CFTC has never been an aggressive prosecutor of insider trading.'
Kalshi and Polymarket represent contrasting approaches to regulation. Kalshi positions itself as compliant, even refusing payouts on a bet regarding the death of Iran's Ayatollah Ali Khamenei to avoid violating CFTC rules against contracts involving terrorism, assassination, or war. A Kalshi spokesperson, Elisabeth Diana, explained that the platform uses software to monitor trades and collects customer data for thorough investigations. In contrast, Polymarket operates primarily offshore and lists geopolitical bets freely, including war-related contracts that drew $425.4 million in volume for the week ending March 1. Polymarket's CEO, Shayne Coplan, did not respond to requests for comment.
The lighter regulatory environment in prediction markets compared to traditional securities stands out. In stock and bond markets under SEC oversight, multiple layers of monitoring exist: brokers must report suspicious trades, exchanges use detection software, and the Financial Industry Regulatory Authority (FINRA) scans activity. 'All these layers of people are trying to catch you,' Verstein said. 'And they may not, people get away with it a lot. But they are in an environment where they have to hide. And that’s really not true for prediction markets yet.' Kalshi's enforcement team size remains undisclosed, and the Coalition for Prediction Markets, which includes Kalshi but not Polymarket, does not monitor trades like FINRA does.
Potential insiders may view prediction markets as low-risk venues. 'If you’re insider trading, you look at prediction markets and think, ‘No one is watching, and if anyone were, no cases have been vigorously contested and no one gets in trouble,’' Verstein added. Defenses in such cases could hinge on claiming diligent research, as the legal framework leaves room for interpretation. Meanwhile, states like Arizona have challenged Kalshi, charging it with operating an illegal gambling business and contesting CFTC jurisdiction.
Proponents argue prediction markets aggregate valuable information, even if it includes insider tips. They liken platforms to 'information institutions' similar to news outlets, suggesting that surfacing non-public data benefits society. However, critics warn of manipulation risks tied to insider trading. 'Insider trading often comes paired with its “sister sin,” market manipulation,' Verstein said. 'If you can trade on when and where bombings happen, you may be tempted to change your bombing target.'
Incidents of alleged manipulation have surfaced. A live map of the Ukraine war displayed a false Russian advance long enough to resolve a Polymarket bet. Both platforms have issued affiliate badges to X (formerly Twitter) accounts, some accused of spreading fake reports. A Polymarket contract led to death threats against a Times of Israel reporter who refused to alter coverage of a missile incident in Israel. California Sen. Adam Schiff, who introduced a bill to ban certain prediction market activities, highlighted these dangers in an interview. 'This field offers even more potential for abuse than insider trading does because you can both insider trade on information that will influence prediction markets, but you can also influence events that influence the prediction markets from an insider’s position,' Schiff said.
Schiff expressed distrust in CFTC Chair Michael Selig, claiming Selig deviated from confirmation hearing promises to let courts handle litigation and consult stakeholders. 'And he’s done the exact opposite,' Schiff said. 'It certainly seems like he has a very strong predisposition that he came into this role with in favor of these prediction betting markets.' Polymarket's Coplan has voiced frustration over regulatory resistance, claiming without evidence that people in the Middle East use platform odds to decide safety measures like sleeping near bomb shelters.
Suspicious bets underscore enforcement challenges. Just before the U.S. captured Venezuelan leader Nicolás Maduro, a bet on his removal from office yielded $400,000 in profit. Another wager on Ayatollah Ali Khamenei's death netted over $500,000. Israel arrested two individuals for Polymarket bets using classified information. U.S. government secrets may also have leaked onto the platform. 'There’s clearly room for new regulation,' said Cindy Schipani, a business law professor at the University of Michigan Ross School of Business. She advocated banning trades on national security-related information, noting that even government secrets trading isn't explicitly illegal beyond potential fraud or duty violations.
While insider trading can reveal hidden truths, its downsides are evident. 'Only certain people benefit, and others are harmed,' Schipani said, emphasizing risks in national security contexts over sports betting. Kalshi's efforts to distance itself from Polymarket's approach include partnering with Crypto.com in the Coalition for Prediction Markets to promote standards. Tools like Lasn's 0xInsider and Tre Upshaw's Polysights tracker aim to expose patterns, with Upshaw claiming an 85% success rate in identifying winning insider cases per a January Bloomberg interview.
Ideally, prediction markets thrive on informed, non-insider trading. Verstein cited short sellers who uncovered fraud at companies like Nikola, leading to Justice Department action. 'Markets should reward good research,' he said. Observing public events, such as tanks in Pasadena, could legitimately inform bets, turning platforms into 'truth machines' valued by academics. Yet, most users bet recreationally, per Nic Carter of Castle Island Ventures. 'Those people won’t bet if they think the markets are unfair,' Carter noted. Schipani echoed this: 'If I knew insiders were always allowed to make a buck, I’d feel the market is rigged.'
As prediction markets expand, calls for stronger safeguards grow. Lasn's platform publicizes suspicious activity to deter misconduct and aid traders. 'When we surface suspicious activity publicly, two things happen,' Lasn said in an email. 'Regular traders can factor that signal into their decisions. And the mere existence of surveillance changes behavior.' With the CFTC's limited reach, the onus falls on exchanges and lawmakers to prevent abuse, ensuring these 'information institutions' deliver accurate insights without compromising fairness or security.