How to Stay Ahead of the Risk That Your Insiders Could Trade on Prediction Markets

Key Points

As prediction markets have expanded, they offer corporate insiders new ways to profit improperly from nonpublic information.
This poses several risks for companies: An insider's trades can have the effect of leaking confidential information (such as the timing of a product launch), and insiders may be tempted to manipulate corporate events to ensure an outcome that will result in a payout.
Insiders’ use of prediction markets is being closely monitored by regulators, who have pursued a number of cases, and the exchanges have moved to enforce their own rules against insiders who have improperly taken positions on prediction markets.
For their own protection, companies may need to update their codes of conduct and other policies governing confidentiality and the use of inside information so they cover the unique aspects of the event contracts traded on these markets.

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Event contracts — the term for what prediction markets offer — are not new. The Commodity Futures Trading Commission (CFTC) has regulated trading of event contracts, such as weather contracts, for decades. Since 2024, when Kalshi and Polymarket began offering event contracts on election results, prediction markets have grown rapidly in popularity and the types of contracts being offered has significantly expanded. Today, major prediction market platforms offer both retail and institutional traders the opportunity to purchase contracts in a wide range of markets, including sports, culture, politics, crypto, economics and finance.

In the past, investors who wanted to trade based on expectations about the success or failure of a company were generally limited to transactions in the securities markets. Prediction markets present a new means for traders to take positions on how both public and private companies will perform, but in a much more granular fashion than they could via securities. For example, traders can currently buy event contracts on when OpenAI will announce an IPO, whether GameStop will acquire eBay, if the Food and Drug Administration will approve a new breast cancer drug, how many spacecraft SpaceX will launch in June and whether Costco will say “hot dog” on its next earnings call.

These new markets also present new ways for corporate insiders to trade on company information improperly. Boards may need to reconsider policies that address the use of prediction markets by directors and employees. And, if the company intends to use prediction markets as a vehicle to hedge its own risks, it will need policies governing the trading of derivatives.

Background on Prediction Markets

An event contract is a type of derivative contract — specifically, a binary option — where the payout is based on the occurrence, nonoccurrence or extent of occurrence of a specific event. Depending on the underlying event, an event contract is either a swap regulated by the CFTC or a security-based swap regulated by the Securities and Exchange Commission (SEC). Currently, all event contracts traded on U.S.-regulated exchanges fall under the Commodity Exchange Act’s definition of a “swap.” However, in the future, exchanges may begin to offer SEC-regulated event contracts, or a different administration could take a different view of the classification of these novel instruments and deem some prediction market trades to be securities.

The Risk to Companies Isn’t Limited to Information That Could Affect a Stock Price

The numerous types of contracts that are available on prediction markets present new opportunities for misuse of corporate information.

Insider trading in the securities market has historically been associated primarily with high-level executives and officers who have information on major corporate events likely to have an effect on their own company’s stock price. Prediction markets, however, create new opportunities for employees, including lower-level employees, to use nonpublic information. For example, the CFTC and Department of Justice (DOJ) recently announced charges against a Google software engineer who allegedly traded event contracts on who would be the most frequently searched person on Google in 2025 while he had confidential information about the search result trends.

The information that the software engineer had would have no effect Google’s stock price, but because prediction markets offered trading on Google’s search results, the software engineer could profit from this information.

Trading on prediction markets by insiders exposes companies to new risks. Because the positions people take are public, trading on events involving the company — say, details of a new product or its release date — can reveal confidential corporate information. There is also a danger that corporate insiders could manipulate events in order to profit on their own prediction market positions.

Insiders’ use of these markets presents two new risks to companies.

Leaks. First, because trading data is public, trading on inside information in markets could lead to important corporate information leaking out. There has already been much speculation that this has occurred in reality TV markets, such as “Survivor,” when a market consensus forms around a particular candidate before the show goes on air. Whether this was due to the misuse of corporate information or rumors, a public perception that the result is already known could reduce viewer interest in the show and the live finale.

This risk isn’t limited to reality TV shows. A corporate insider could, for example, trade on the expected release date for a new mobile phone with advanced features, in the process potentially revealing the launch date and ruining a carefully planned advertising campaign.

Even if no nonpublic information has in fact leaked through prediction markets, management could face questions about whether trading on key financial inputs that could affect upcoming earning reports reflects inside information.

Manipulation of events. There is also the risk that insiders will manipulate events in order to profit on their own prediction market trading. A high risk area is contracts where the outcome is controlled by a single person or small group at the company. For example, where payouts are based on whether certain words are spoken on an earning call, a rogue officer could take advantage of those markets to trade on words that he intends to say, or not say, during the call. Or a lower-level employee involved in drafting remarks for the earnings call could plant words in the script.

Event Contract Trading Is Being Monitored by Enforcement Officials

Boards that are concerned about insiders revealing corporate information by trading on prediction markets should be aware that U.S. regulators, including the exchanges themselves, have made this a significant area of focus. CFTC Director of Enforcement David Miller has repeatedly emphasized in public speeches that enforcing insider trading laws with regard to prediction markets is a top priority for the agency. Jay Clayton, the U.S. Attorney for the Southern District of New York, has said that he anticipates his office will bring cases based on improper insider use of corporate information on prediction markets. And Kalshi, a popular prediction market platform, has already announced a number of enforcement cases against individuals who have traded while in possession of material nonpublic information on its exchange.

Preventing Abuses May Hinge on the Wording of Company Policies

Companies should be sure there are no loopholes in their policies governing confidentiality and the use of inside information that could allow the misuse of that information on prediction markets.

Insider trading in the commodities market on corporate information is prohibited under the Commodity Exchange Act, as well as the criminal wire and mail fraud statutes, only if the trading occurs in breach of a duty to the source of the information. In alleging a breach of a duty, the DOJ and CFTC are likely to point to corporate policies outlining insiders’ duties.

If a company’s insider trading policies are limited to securities transactions, or if only high-level employees are required to sign nondisclosure agreements, these policies may be insufficient to create the duty required by insider trading statutes. In order to eliminate these gaps, companies should review their codes of conduct, and nondisclosure and other relevant policies, to assess whether they encompass trading in these new instruments. Companies should consider which policies are most appropriate to cover trading on prediction markets, and that they apply to all employees, and third party vendors, who may be in a position to trade on company information.

Exchange Rules Could Apply to Companies Planning to Use Prediction Markets to Hedge Risks

If a company intends to use prediction markets to hedge its own risks, there will be other issues for its board to consider.

To date, prediction markets have seen more popularity with retail traders, in part because the contracts must be fully collateralized. However, many prediction markets are beginning to offer trading on margin, as well as block trading, which increases their usefulness as a means to hedge corporate risks.

While the Commodities Exchange Act’s prohibition on insider trading does not restrict the ability to trade on one’s own inside information (e.g., a company trading on its own nonpublic information), many prediction markets have adopted rules that do prohibit this type of insider trading. Companies that plan to use prediction markets as a means to hedge should therefore review the rules of the exchanges that they plan to utilize and ensure that their trading is consistent with those rules.

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