Prediction Market Risk: The Next Wave of Insider Trading

Prediction markets—platforms like Polymarket and Kalshi where users can wager on the outcome of almost any future event—have exploded into a multibillion-dollar arena that sits uneasily between gambling, commodities trading, and securities law. In this Ethicsverse session, host Nick Gallo is joined by attorneys Jason Hicks (Womble Bond Dickinson) and Michael Mann (Sidley Austin) to unpack why these markets represent a genuinely new compliance challenge. Unlike traditional insider trading, which requires a connection to a security and is policed by nearly a century of SEC doctrine, prediction-market misconduct can arise whenever an employee monetizes confidential workplace information—regardless of whether that information would ever move a stock price. The panel works through real cases, overlapping federal and state jurisdiction, the practical impossibility of monitoring, and what compliance teams can actually do right now. The recurring conclusion: this is less a problem of new rules than of culture, duty, and education.

This episode of The Ethicsverse examines the emergent compliance and legal risks posed by regulated prediction markets and their structural analogy to, and divergence from, traditional insider trading. Drawing on the Commodity Exchange Act, CFTC anti-fraud provisions paralleling SEC Rule 10b-5, and misappropriation-based theories of wire and commodities fraud, the panelists distinguish the doctrinal foundations of classical insider trading—rooted in securities statutes and fiduciary duty—from the broader liability surface created by event-contract markets. The discussion centers on the principle that prediction-market misconduct hinges not on the existence of a traded security but on the breach of a duty to safeguard information obtained through employment, thereby extending exposure to entities historically outside insider-trading concern, including nonprofits, universities, and private firms. Through analysis of contemporary enforcement actions—notably the Google search-data indictment and the reversed Chastain (OpenSea) conviction—the session interrogates unresolved questions of materiality, the definition of confidential business information as "property" under wire fraud statutes, and the consequences of psychological distance in lowering inhibitions against misconduct. The panel further surveys the contested regulatory landscape, including the jurisdictional conflict between the CFTC and state gaming authorities, the implications of an under-staffed Commission, and the prospect of eventual Supreme Court resolution.

Key Takeaways

Prediction Markets Are Insider Trading Without the Guardrails

Prediction markets allow participants to wager on the outcome of virtually any event, transforming confidential workplace knowledge into a directly monetizable asset in ways traditional insider-trading law never anticipated.
Securities-based insider trading rests on nearly a century of doctrine, surveillance infrastructure, and institutional muscle memory, almost none of which currently applies to the prediction-market space.
The panel repeatedly characterized the environment as a regulatory "Wild West," where compliance teams confront familiar-feeling risks without the established legal scaffolding that normally guides enforcement and defense.

Every Company Is Now a "Public" Company in Information Terms

Traditional insider trading required a nexus to a security, but prediction markets mean any nonpublic fact an organization knows before the world does can become the basis for a profitable wager.
This dramatically expands the attack surface from finance and treasury functions to virtually every employee who handles sensitive operational, commercial, or scheduling information.
Nonprofits, universities, and private companies that never had reason to worry about insider trading must now recognize that their confidential information carries comparable exposure.

The Legal Theory Shifts From Securities Fraud to Misappropriation

Classical insider trading turns on Section 10 of the Securities Exchange Act and Rule 10b-5, which require deception connected to the purchase or sale of a security—a connection often absent in prediction-market bets.
The Commodity Exchange Act contains anti-fraud provisions mirroring Rule 10b-5, and prediction contracts are treated as swaps regulated by the CFTC, opening civil liability for manipulating or deceiving in connection with these instruments.
Wire fraud charges under the misappropriation theory can attach when information is obtained through a breach of duty, shifting the focus from harming a trading counterparty to harming the employer who entrusted the information.

The Google Case Redefines What "Material" Means

A former Google security engineer was charged with commodities fraud, wire fraud, and money laundering for allegedly using advance knowledge of the year's most-searched person to win more than $1 million on a prediction market.
The information at issue would never qualify as material under traditional securities analysis because it has no bearing on Google's share price, illustrating that materiality in prediction markets attaches to whatever can move a contract's value.
Prosecutors face the harder task of proving that such seemingly trivial business information qualifies as confidential "property" under wire fraud statutes, a question that proved decisive in related litigation.

The Chastain Reversal Signals Genuine Legal Uncertainty

The OpenSea executive's wire fraud conviction for trading ahead of NFT featuring decisions was reversed by the Second Circuit, partly over questions about what counts as confidential business information.
That reversal foreshadows similar arguments in the Google matter, where the government must affirmatively demonstrate the commercial significance of the underlying information as an essential element of its case.
For employers, this means responding to government inquiries may become burdensome and unpredictable, since the boundaries of "confidential business information" as property remain genuinely contested.

Employees Can Manufacture Their Own Material Events

Because prediction markets let employees bet on outcomes they can influence, an individual could intentionally tank a product launch or trigger a network outage to guarantee a winning wager.
This scenario represents a more severe risk than reputational entanglement, because it can directly and substantially harm the operating performance of the company itself.
Employers may be unable to anticipate the full range of ways employees could engineer or exploit events, making this a category of insider risk that traditional controls were never designed to catch.

Psychological Distance Makes the Misconduct Spread

Behavioral research cited in the session—associated with Dan Ariely—shows that people cheat most when the link between the dishonest act and the resulting money feels indirect.
Betting on a metric like "most-searched person" does not feel like betraying an employer, and that emotional and conceptual gap is precisely what allows this behavior to proliferate.
Compliance messaging therefore should not dwell on whether a given bet is "technically legal," but should consistently frame the act of converting company information for personal gain as a violation of integrity.

Jurisdiction Is a Tangle the Courts Have Not Resolved

The CFTC has asserted authority over prediction contracts as swaps, while states—protective of their lucrative, heavily regulated sports-gambling franchises—argue many event contracts amount to illegal gambling.
Multiple lawsuits are working through the appellate system with mixed results, and most observers expect the Supreme Court will eventually have to settle the question.
If states prevail on the theory that certain event contracts are illegal gambling, the logic could sweep in non-sports contracts as well, raising the specter of a 50-state regulatory patchwork reminiscent of data-privacy law.

Company Liability Is Mostly Reputational—For Now

Enforcement to date has targeted individuals, and there is no clear framework imposing prediction-market-specific compliance duties on most employers the way SEC rules govern regulated entities.
Broad federal aiding-and-abetting theories mean no one should assume zero corporate exposure, but the more realistic threat is the secondary cost of being dragged into an investigation tied to an employee's conduct.
Platforms like Kalshi now require some bettors to register their employer and run internal audits that may publicly name and ban violators, meaning wrongdoing may surface through self-reporting before any regulator gets involved.

Start Simple: Policy, Training, and a Culture of Duty

Companies with an existing insider-trading policy should confirm it is broad enough to cover prediction-market activity—or amend it explicitly so there is no ambiguity—while those without one should run a fresh risk assessment.
A simple three-question test can fit on a notecard: Did I learn this information at work, is it nonpublic, and does the bet's outcome depend on it? A "yes, yes, yes" answer means an employee should not place the wager.
Because monitoring is largely impractical, detection will most often come from platform alerts or internal speak-up reports, making a clear policy, targeted training, and a genuine culture of integrity the most effective controls available.

Closing Summary

Prediction markets have arrived faster than the law or most compliance programs can adapt, collapsing the once-narrow world of insider trading into a sprawling risk that reaches nearly every employee and every type of organization. The panel made clear that the core legal exposure flows not from trading a security but from breaching the duty to protect information learned on the job—a shift that pulls nonprofits, universities, and private companies into territory they never expected to occupy. With jurisdiction unsettled, materiality redefined, and monitoring largely impractical, the practical path forward is not an avalanche of new rules but a return to fundamentals: clear policies that explicitly name prediction markets, fresh risk assessments, targeted education, robust speak-up channels, and above all a culture in which employees treat company information as a shared trust rather than a personal trading edge. As the panelists put it, this is ultimately a conflict-of-interest and divided-loyalty problem—and the organizations that get ahead of it now will spend far less time defending themselves later.