Betting on What You Know: Insider Trading Risks in the Prediction Market Era
Predictions range from the mundane, like tomorrow's weather, to the consequential, such as whether a political leader will be removed from power. While individuals have long profited from correctly anticipating future events, prediction markets now offer a distinct mechanism that allows people to speculate directly on the outcome of an event without any underlying stake in the event itself. For example, according to the Department of Justice, one individual reportedly profited over $400,000 by correctly predicting that Venezuelan leader Nicolás Maduro would be removed from office by a specified date. But what if the individual making the prediction has inside information that makes the prediction more akin to a foregone conclusion? This raises significant legal concerns, particularly whether current insider trading frameworks can adequately address the misuse of non-public information in the rapidly expanding world of prediction markets.
From a technical perspective, predictions are traded as event contracts on prediction markets. Event contracts are binary instruments: individuals pay to take a "yes" or "no" position on whether a future event will occur, and receive a fixed payout if correct. Trading prices reflect the market's implied probability that an event will or will not occur. Because these contracts can be based on virtually any real-world event, prediction markets have exceptionally broad scope, creating correspondingly broad opportunities for those with advance knowledge to profit from information not yet available to the public.
Legally, event contracts are regulated by the Commodity Futures Trading Commission (CFTC), a federal agency, pursuant to the Commodity Exchange Act (CEA). Because event contracts can encompass real-world occurrences, the novelty of prediction markets and the broad subject matter scope of event contracts have raised questions about how insider trading may be implicated on these markets. Under Securities and Exchange Commission (SEC) Rule 10b-5, 17 C.F.R. § 240.10b-5, trading based on material non-public information is prohibited, and the "classic" theory of insider trading imposes liability on corporate insiders who trade their company's securities based on material nonpublic information (MNPI).
While the classic theory targets insiders, courts have extended liability to outsiders through doctrines like tipper-tippee liability, where an insider shares MNPI with an outsider who then trades on it, and the misappropriation theory, which reaches those who breach a duty of trust to the source of the information. Critically, however, these theories have historically been tethered to corporate information, fiduciary relationships, and the trading of securities. Prediction markets operate largely outside this framework: event contracts can be based on real-world occurrences (political, governmental, athletic, or otherwise), and those with advance knowledge of such events need not owe any fiduciary duty to profit from that information.
The CFTC has responded by asserting that its own anti-fraud rule, Rule 180.1, 17 C.F.R. § 180.1 (modeled after SEC Rule 10b-5), applies to prediction markets and prohibits trading on MNPI obtained in breach of a duty of trust and confidence. Still, the law as applied in this area remains relatively novel and unsettled.
In February 2026, the CFTC's Division of Enforcement issued a formal advisory making clear that MNPI-based event-contract trading constitutes conduct the CFTC can pursue as "insider trading," with CFTC Enforcement Director David Miller noting in a speech that "a myth has spread that insider trading is permissible . . . in the prediction markets," but that is "[n]ot so." Just two months later, the CFTC filed its first-ever insider trading enforcement action involving event contracts, charging a U.S. Army service member who allegedly used classified information about a military operation to profit on prediction market bets. In a press release, Director Miller described this case as signaling that the agency "will not tolerate insider trading in our markets, period."
While companies have had decades to develop robust compliance measures, training programs, and internal controls focused on traditional securities-based insider trading, they have not had comparable time to address the relatively new world of prediction markets. The case law, regulatory guidance, and industry best practices that underpin securities compliance programs do not yet exist for prediction market activity. This creates both uncertainty and heightened risk: uncertainty because the legal contours of how insider trading doctrines apply to event contracts remain unsettled, and risk because prediction markets offer exceptionally broad scope (covering everything from corporate earnings to regulatory approvals to executive departures) and have experienced explosive growth.
According to The Block's 2026 Digital Assets Outlook Report, prediction market trading volume has reportedly increased approximately 130-fold between early 2024 and late 2025, with first quarter 2026 trading volume roughly 40 percent larger than all of 2025 combined. The result is a compliance gap: many existing insider trading policies were drafted for securities markets and may not cover event contracts or prediction market platforms, leaving companies and their employees exposed to enforcement risk, reputational harm, and potential civil liability.
Despite these uncertainties, companies can take proactive steps to mitigate prediction market-related insider trading risks. Existing insider trading policies may be insufficient because they typically apply only to officers, directors, or employees traditionally expected to handle MNPI, leaving a significant portion of the workforce unaddressed. Yet in the prediction market context, any employee (from the chief executive all the way down to a warehouse associate or entry-level analyst) with advance knowledge of a material event (a product launch, a regulatory decision, an executive departure) could potentially exploit that information. To close this gap, companies should consider broadening the scope of their insider trading policies or codes of conduct to cover all employees and to expressly address prediction market activity. Companies may also adopt disclosure requirements obligating employees to report involvement in prediction markets, particularly those tied to the company's industry, or prohibit participation in specific event contract markets altogether. Finally, employee training is essential: many employees may not recognize that trading on prediction markets based on workplace knowledge could constitute misconduct, even if traditional securities are not involved. Updating training materials to address prediction markets and the potential legal and disciplinary consequences of misusing confidential information can help ensure that employees understand the boundaries.
Prediction markets have moved from the fringes of financial innovation to the mainstream, with trading volumes that have grown exponentially in a remarkably short period. While regulators have made clear that insider trading laws apply (as evidenced by the CFTC's February 2026 advisory and enforcement priorities), the legal landscape remains unsettled, and the compliance infrastructure that companies have built over decades for traditional securities markets does not yet extend to this new frontier. The risks are real and immediate: event contracts can be tied to virtually any corporate development, and employees at every level of an organization may possess information that, while immaterial to a company's stock price, could be highly valuable on a prediction market.
Companies that wait for regulatory clarity before acting may find themselves exposed to enforcement risk, reputational harm, and civil liability. Those that act now, by broadening insider trading policies to expressly cover prediction markets, extending coverage to all employees, adopting disclosure or prohibition requirements, and updating training programs, will be better positioned to navigate this rapidly evolving area and protect both their organizations and their employees from the consequences of misusing confidential information in a world where betting on what you know has never been easier.
