How Prediction Markets Could Enable Insider Trading

Insider trading continues to be a main concern for regulators across the globe. Originally, the problem was with traditional markets. However, the emergence of blockchain-powered prediction markets has renewed focus on how insider information can benefit those who possess the right connections or positions. Here’s what you need to know.

What is Insider Trading?

According to regulatory agencies like the SEC, insider trading is the act of using exclusive information to dictate the purchase or sale of securities. This information includes anything that provides the investor with an unfair advantage, breaching the trust of the public.

Insider trading enables individuals to mitigate losses, including those resulting from scandals or poor financial performance. It also allows them to reposition for guaranteed gains, such as news of major government contracts, changes to regulations, mergers, or new technological developments.

Penalties

The current penalties emerged following decades of cases, each helping to set a precedent. Notably, the first insider trading case occurred in 1909. This case was known as Strong v Rapide, and it mandated that directors couldn’t trade using material information.

History

In 1934, the SEC officially introduced insider trading legislation, which continually matured throughout the decades, including to cover those who are associated with people in possession of material information. Today’s penalties include a lengthy prison sentence of up to 20 years, forfeiture of the ill-gotten gains, and fines up to 3x the amount you profited.

Insider Trading Statistics

Insider trading enforcement remains a priority for regulators. Each year, the U.S. Securities and Exchange Commission (SEC) brings dozens of enforcement actions related to insider trading and market manipulation. These cases typically involve corporate executives, financial professionals, or individuals who obtained material nonpublic information through personal connections.

Example of Insider Trading

One of the most common types of insider trading involves a company executive telling a friend corporate information, such as whether a merger was successful or not. The friend uses this information to buy/sell shares to secure massive gains. From there, the profits are split between the participants.

This approach makes it harder to determine insider trading because it’s not a company employee directly. As such, the SEC needs to conduct investigations to connect the trader’s unbelievable luck to more than coincidence.

Famous Insider Trading Cases

Insider trading cases happen every year. However, some cases capture the attention of the public more than others. Cases involving a major celebrity or cases where the amount gained is in the hundreds of millions usually fit this description. These cases attract international attention, spurring additional support and funding for anti-insider trading efforts.

Martha Stewart

A recent example involves Martha Stewart. She is famous for several reasons, including her magazines and shows, which featured lifestyle, home, and cuisine tips. In 2001, Stewart was accused of insider trading, and in 2004, she was convicted in a case that made headlines.

Court records reveal that Stewart sold 4,000 ImClone shares on insider information regarding pending FDA approval for an experimental cancer drug. This allowed her to avoid $45,673 in losses.

However, in the long run, it cost her much more. Her penalties included 5 months in federal prison, 5 months under house arrest, and more than $200k in fines. These penalties are in addition to the embarrassment caused by the scandal.

How Prediction Markets Complicate Insider Trading Laws

The emergence of prediction markets has exacerbated the situation considerably. These non-regulated platforms enable anyone to place wagers on the potential outcome of scenarios and events.

Source – Kalshi

Prediction markets gained popularity during the 2024 elections, where they were used as both a way to wager on the election results and as a tool for analysts to gauge public sentiment. Since that time, the prediction market has expanded into a multi-billion-dollar sector with more growth expected.

Why Regulators Are Concerned About Prediction Markets

The flexibility of prediction markets raises concern among many regulators. Specifically, the sudden influx of so-called “death markets” has been a primary issue under scrutiny lately. This term refers to prediction market bets based on conflicts.

Conflict-based prediction markets raise several concerns because they can add another layer of profitability to the carnage and suffering that is war. Additionally, they incentivize operational leaks from military personnel and others in the know.

Venezuela

The recent attack on Venezuela by US military officials would have been very difficult to time precisely, although most analysts agree it was going to happen. However, there was an anonymous trader who had no problem predicting this action.

This unknown Polymarket user managed to wager heavily that Trump would attack the country precisely when the attacks occurred. This unbelievable foresight enabled the user to secure $400k in profits. It also set off the insider trading alarm bells, as many speculate that the trader had some connection to the operation.

Iran

The recent attacks on Iran are another glaring example of insider trading, albeit on a much larger scale. This go-around, bettors secured +$500M in profits betting that the US would attack Iran.

This time, the inside trading was even more egregious, with several of the bets being made by six accounts that were opened and funded minutes prior. The betting was also much more specific as well.

Despite low odds of 15-20%, the bets predicted the exact time and even the removal of the country’s 30-year ruler, Ayatollah Ali Khamenei. Additionally, public records reveal that Donald Trump Jr. holds a stake in and serves on the advisory board of Polymarket.

Regulatory Response

There has been a strong pushback by the public to these revelations, sparking more oversight. On February 25, 2026, the CFTC officially launched several investigations into the trades made around the recent military actions.

Several lawmakers have come forth with legislation designed to prevent similar situations in the future. For example, Rep. Ritchie Torres has put forth legislation that would effectively ban any government official from using prediction markets. When questioned on his motivation, he cited the recent Venezuela market trades as his primary reason.

These efforts are just one of many that are now pouring into lawmakers’ offices. For example,  Sen. Chris Murphy has introduced a new law that would make it illegal to trade on any government actions on prediction markets. Also, Sen. Jeff Merkley has put forth bills that would prevent government officials from participating in prediction market trading.

States Step Up

Several states have already moved to block prediction markets. These states include many that authorize other forms of gambling, like Nevada, New York, and others. Additionally, there are states like Tennessee that have taken their crusade further.

Tennessee filed cease and desist orders under the grounds of unlisted gambling. This event is one of +20 such federal lawsuits against prediction markets. Notably, the majority of these lawsuits allege unlicensed gambling or operating exchanges.

Platform Responses

There were several key responses that the leading prediction markets made following the revelations. Polymarket banned the accused accounts. It also spoke on how blockchain technology provides heightened transparency, which can be set up to automatically detect these trading anomalies in real time in the future.

Kalshi, another leading prediction market exchange, also banned the suspected accounts. Company executives then spoke on the need for further oversight to prevent these issues in the future. The company also publicly supports a ban on government officials participating in these markets.

Is the Practice Exclusive to Blockchain Prediction Markets?

The practice of insider trading is as old as the markets themselves. However, the rise of blockchain technology has made it possible for a new level of prediction market to exist, heightened the risk of insider trading.

Prediction vs Traditional Markets

There are some key differences in the use of insider trading in the prediction versus traditional markets. For one, the sheer scope of insider trading allegations. In traditional markets, insider trading deals with nonpublic corporate information.

In prediction markets, the insider information could cover a huge scope of topics, from market movements to conflicts, political outcomes, sports events, or even new products. This marks a clear difference in responsibilities for the parties involved.

Legal Responsibilities

For example, it’s easy to prove that a corporate executive used his insider information or passed it on to a friend to secure profits. This is a clear breach of trust. However, it becomes much more difficult to utilize the same legal precedents against positions or individuals who don’t have any such fiduciary responsibilities to the public.

Regulatory Climate

There are already set-in-stone securities laws that have been adapted alongside the market over the last 100 years. This well-structured legal framework is in stark contrast to the complete lack of regulations found in the prediction market sector currently.

Enforcement

Traditionally, the SEC has no problem prosecuting people for insider trading, as the laws are well refined. However, the fact that prediction markets often depend on people with no fiduciary responsibility in terms of protecting information, it means that it’s very difficult to prosecute these individuals.

Additionally, there are many who see the introduction of insider information as a means to increase the prediction market’s accuracy rather than a hindrance. They believe that the goal of prediction markets should be efficiency and accuracy. They state that these platforms serve as a global metric, which is one of the key reasons it would be hard to ban insider information.

Notably, there have been no legal repercussions for any insider trading on prediction markets yet. However, regulators are now in the midst of an investigation with the goal to determine who profited from the latest death market bets.

Swipe to scroll →

Could Congress Get Banned from Prediction Markets?

The recent spotlight placed on prediction market insider trading has had some interesting effects. For one, the number of people calling for a complete ban on Congress and government officials from prediction markets continues to grow.

Could Prediction Markets Get Banned?

While the issues of insider trading continue to grow, there has been no overall movement to ban prediction markets. Laws like the End Prediction Market Corruption Act seek to ban government officials but stop short of ending the practice altogether.

What Prediction Markets Mean for Investors

There are some key takeaways that investors can learn from this situation. For one, this scenario highlights the close ties between executives and politicians within the prediction markets. Not only do you have politicians making bets, but they are also investors and advisory board members on these platforms. ​

Increased Accuracy

This latest situation demonstrates how these networks continue to gain an edge in terms of predicting the outcomes of certain situations. The more accurate a prediction market becomes, the more likely it is to see more user participation and use by analysts.

Note that these platforms are often cited by professional analysts as a valid metric, meaning that they are increasingly seen by many as legitimate operations. This added validity will work to help drive more users to these networks, which, in theory, should increase accuracy further.

Investors Should Use This Tool

Recognizing this fact, you could start to integrate prediction market data into your trading strategy. This approach is free and does not require any betting. Instead, you can check these networks to see how they rate public sentiment, giving yourself an edge in terms of overall market view.

Insider Trading and Prediction Markets | Conclusion

The more research you do into prediction markets and insider trading, the more obvious it becomes that this is going to be a difficult issue to solve. The sheer scope of the industry means that there will always be someone with no fiduciary responsibility holding vital information. As such, the regulators have their work cut out for them.

Learn about other interesting investing tips here.