Prediction Markets and the Law of Insider Trading: A Practical Guide

Prediction markets, where users can take monetary positions on nearly endless scenarios, have surged in popularity in recent months. As prediction markets become more widespread, however, concerns about insider trading on the platforms also has grown. Because prediction markets may not involve “securities” and represent a relatively new technology, many of the traditional safeguards used to combat insider trading may not address prediction markets, creating the potential for misconduct.

While companies consider how to address problems associated with prediction markets, some federal prosecutors and regulators have vowed to vigorously police fraud on these platforms. At a conference of securities law practitioners held in early February 2026, United States Attorney for the Southern District of New York (SDNY) Jay Clayton noted that prediction markets are “an area that I am looking at,” and that just because prediction markets are a novel technology “doesn’t insulate you from fraud,” adding that he expects enforcement actions in this space. Similarly, Commodity Futures Trading Commission (CFTC) Chair Michael Selig has stated with regard to prediction markets that “[i]f you attempt to engage in manipulation, fraud, or insider trading, we will find you and take action.”

Nevertheless, the precise mechanisms for enforcement in prediction markets are unclear. Prediction markets do not fit neatly into standard insider trading frameworks, posing complex issues for companies to address. This article examines the regulation of prediction markets and what companies should do to address potential risks of insider trading on prediction markets.

Key Takeaways for Public Companies

• Prediction markets are increasingly popular, but with their rise comes potential risks. In a number of high-profile instances, users have seemingly profited from confidential information that they may have obtained through their employment.
• The law surrounding insider trading on prediction markets is unclear, but complacency would be unwise. While the regulation of prediction markets is complex and evolving, regulators and prosecutors have indicated a priority to police insider trading on prediction markets. Companies should be proactive in adopting policies and oversight mechanisms to prohibit insider trading by employees on prediction markets.
• Companies should consider updating their Code of Conduct, Insider Trading Policy, employee Securities or Investment Policy, and internal training procedures to address the risks of insider trading on prediction markets. As discussed below, Companies should be thorough and clear in revisiting and updating their internal policies and procedures to address the risk of insider trading on prediction markets.

Overview of Prediction Markets

Generally speaking, prediction markets refer to platforms on which participants purchase or sell contracts tied to the outcome of future events. These contracts typically pay a fixed amount if a specified event occurs and nothing if it does not. The trading price of a contract fluctuates based on supply and demand and is often understood to reflect the market’s implied probability that the event will occur. For example, a contract trading at $0.60 on the question of whether a company will complete a merger by a certain date may be interpreted as reflecting a 60% implied probability of completion. If the merger occurs, a user who bought the $0.60 contract could hold until it settles at $1, or sell as the probability increases (for example, exiting at an $0.80 position). In the same scenario, if someone believes the merger will not occur, they could purchase a “no” position at $0.40. If the merger becomes unlikely, the value of their contract would increase until settling at $1, when it either is called off or does not close by the expiration date. If the merger occurs on the expiration date, however, the contract would still expire as worthless.

These contracts can cover a wide range of scenarios, from the mundane to the esoteric. A prediction market user could purchase or sell contracts on whether it will rain in New York on a particular day, who the Republican Vice Presidential candidate will be in 2028, or how many times an announcer in a particular basketball game will use the word “ankle.”

Recently, prediction markets garnered attention for the seemingly improbable success of certain users. For example, during the 2026 Super Bowl, participants could take a number of positions on the question of “Who will perform during the half-time show,” with potential guests like Lady Gaga and Ricky Martin listed. According to news reports, one account that was created a day before the Super Bowl purchased nearly $70,000 of contracts related to the half-time show and profited on all but one. In another high-profile example, a recently created account purchased a large contract that Venezuelan President Nicolás Maduro would be deposed just hours before his capture by U.S. special forces, leading to a payout of more than $400,000.

These examples highlight a potential problem; with the expansive array of contract scenarios available on prediction markets, insiders may be able to use non-public information to profit with an unfair advantage. Traditionally, illegal insider trading refers to transacting in a security while in possession of material non-public information or “MNPI” in breach of a fiduciary duty or other relationship of trust or confidence. For example, an employee who, during the course of their employment, becomes privy to MNPI such as future business combination or earnings information, and who transacts in company securities while in possession of this MNPI, likely has committed insider trading absent an applicable defense. The law and regulation of these scenarios is relatively clear and has been defined over decades of jurisprudence. The problem posed by prediction markets is novel and less clear; what happens if an employee of a company has access to non-public information that would not ordinarily impact the company’s stock price, but uses that information to purchase a contract tied to the information? For example, a clerk in a company’s investor relations department has access to an earnings script and uses that to purchase a specific contract that the company’s earnings script contains a particular number of words. The employee is enriching himself with inside information and participating in a market on the basis of information asymmetry, but is that illegal?

Not only is the answer uncertain, but the particular laws and regulatory bodies that would enforce any such laws are unclear. That said, there are some likely answers.

The Regulatory Landscape

Federal Law

At the federal level, the regulation of prediction markets primarily falls to the CFTC (though, as discussed below, some states have challenged this). Particular scenarios listed on prediction markets are treated as “events contracts,” which are regulated by the Commodity Exchange Act (CEA). In a statement released February 17, 2026, the CFTC affirmed its view that it possesses exclusive jurisdiction over the U.S. commodity derivatives markets, “including event contract markets commonly referred to as prediction markets.”[1]

Notably, though, the Securities and Exchange Commission (SEC) and Department of Justice (DOJ) also oversee regulation of financial entities and, in particular, have traditionally enforced insider trading law. The SEC typically brings civil actions against violators of insider trading law while the DOJ brings criminal charges. Both the SEC and DOJ police insider trading through Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 thereunder. Section 10(b) and Rule 10b-5 are antifraud laws. Section 10(b) makes it unlawful to “use or employ, in connection with the purchase or sale of any security” a “manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe.” Rule 10b-5 is a broad antifraud rule, that applies to “any person” who “defrauds” another person in “the purchase or sale of any security.” As is clear by their terms, however, both Section 10(b) and Rule 10b-5 require the purchase or sale of a security, and most prediction market purchases and sales do not involve “securities.” Thus, it’s unclear whether a traditional theory of insider trading could apply to prediction market-based fraud.

The CFTC, however, has what essentially serves as mirror provisions to Section 10(b) and Rule 10b-5. CEA Section 6(c)(1) broadly prohibits the use or attempted use of “any manipulative or deceptive device or contrivance,” “in connection with” a swap, future or cash contract, in contravention of the CFTC. CFTC Regulation 180.1, which was adopted in 2011, was expressly modeled on Rule 10b-5 and prohibits fraud and fraud-based manipulation, as well as attempted fraud or manipulation, by any person, acting intentionally or recklessly, directly or indirectly, in connection with any swap or cash or futures contract. Specifically, Rule 180.1(a) targets manipulative and deceptive devices and contrivances, employed intentionally or recklessly, regardless of whether the conduct in question was intended to create or did create an artificial price. Rule 180.1(b) also provides that the rule may not be construed to require disclosure to another person of material nonpublic information unless disclosure is necessary to make any statement to that person “in or in connection with the transaction” not materially misleading. Unlike Section 10(b), however, these provisions do not require the purchase or sale of a “security,” but instead apply to commodities and derivatives transactions.

Given the CFTC’s assertion of jurisdiction over prediction markets and its status as the regulatory body with the most tailored rules to insider trading on prediction markets, we may expect to see the CFTC enforcing prediction market-related insider trading on these platforms. The CFTC also has explicitly stated that it intends to use all available tools to police misconduct in prediction markets. In an advisory published on February 25, 2026, the CFTC noted that it “has full authority to police illegal trading practices” occurring on any prediction market, including:

• Misappropriation of confidential information in breach of a pre-existing duty of trust and confidence to the source of the information (commonly known as “insider trading”) pursuant to Section 6(c)(1) of the CEA, and Regulation 180.1(a)(1) and (3);
• Pre-arranged, noncompetitive trading and wash sales, under Section 4c(a)(1) and (2)(A) of the CEA, and Regulation 1.38(a);
• Other prohibited trading practices including disruptive trading pursuant to Section 4c(a)(5); and
• Fraud and manipulation under various sections of the Act.[2]

The CFTC also has noted that prediction markets themselves have an independent duty pursuant to the core principles of the Act to maintain audit trails, conduct surveillance, and enforce rules against prohibited practices under Section 5(d) of the CEA.

Nevertheless, the CFTC has not aggressively enforced these rules in the past and has less enforcement resources than the DOJ and SEC. Moreover, while traditional securities law notions of insider trading may not cleanly apply to prediction market activity, DOJ enforcement is not out of the question. As noted above in the remarks made by SDNY U.S. Attorney Jay Clayton, federal prosecutors may look to broader fraud statutes where insider trading doctrine proves a poor fit. In this regard, federal wire fraud and conspiracy statutes do not require the purchase or sale of a security. If an individual uses confidential information obtained through employment to profit through deception, prosecutors could frame that conduct as a scheme to defraud the counterparty platform or other market participants. State law enforcement authorities also contend that they can bring antifraud actions, both criminally and civilly, in this space, adding to the jurisdictional uncertainty of this topic.

Fundamentally, it is important to remember that insider trading is primarily a fraud-based crime. A person engaged in insider trading is viewed as committing fraud both on the market, because the employee has unfair information asymmetry with the other party to a contract, and also as a breach of his implicit (and likely explicit, through company policy) duty to safeguard the information of his employer.

Extended to prediction market activity, defining fraud may be more difficult, but the fact remains that if a market participant is engaging in deceptive activity by trading on the basis of an unfair advantage, they are likely engaged in fraud and will be susceptible to penalties.

State Regulation

In addition to the federal regulatory regime, prediction markets may be subject to state regulation. In particular, state fraud laws may provide a vehicle for enforcement against misconduct occurring on prediction markets. For example, New York’s Martin Act grants the New York attorney general broad authority to investigate and prosecute securities and commodities fraud.[3] The Martin Act has historically been applied expansively and could, depending on how a particular event contract is structured, provide a basis for state-level enforcement if trading activity is deemed deceptive or manipulative.

More broadly, most states maintain consumer protection statutes and general antifraud provisions that prohibit deceptive business practices. Even where prediction markets fall outside traditional securities definitions, a state regulator could argue that trading based on confidential information constitutes a deceptive practice harming counterparties or the integrity of the marketplace.

Lastly, a number of states have challenged the CFTC’s authority to regulate prediction markets as a fundamental matter, claiming that such markets are operating as unlicensed gambling operations instead of derivatives contracts. States such as Nevada and Arizona have initiated enforcement actions or lawsuits asserting jurisdiction under state gambling statutes, while the CFTC maintains that federal derivatives regulation preempts such claims. These lawsuits will likely continue to grow as courts face questions of preemption and federalism, with the ultimate outcome unclear.

Prediction Market Terms of Service

Perhaps the most straightforward regime, prediction markets themselves impose restrictions on misconduct through their terms of service. Most platforms prohibit manipulation, misuse of confidential information, coordinated trading schemes, and other abusive conduct. These provisions often permit the platform to suspend accounts, void transactions, and disgorge profits.

Recently, one high-profile prediction market platform took action against users allegedly engaged in improper trading activity. In one case, a political candidate was found trading on his own candidacy and in another, a user was purchasing contracts on a scenario related to a YouTube channel that he was an editor of, and therefore likely had advanced knowledge of the contents of the channel’s videos prior to the time they were publicly posted. Both individuals were fined, forced to disgorge the profits from their purchases and sales, and suspended from the platforms.

What Should Companies Do?

While the law of insider trading on prediction markets is complex and uncertain, companies should not wait for any judicial resolutions to proactively police the conduct of their own employees. The argument that an employee did not violate insider trading law due to the technical distinction between a security and a derivatives contract may matter little in public opinion, and companies face potential market and reputational damage if they are found to be associated with any type of insider trading.

In addressing the risks associated with insider trading on prediction markets, the following actions should be considered.

Start with the Employee Code of Conduct

Because prediction markets do not involve “securities,” a company’s insider trading policy, surprisingly, may not be the best primary policy to address the risks of insider trading on prediction markets. Moreover, insider trading policies often apply to directors, officers, and certain employees that can be expected to receive traditional material non-public information, but the wide-ranging nature of prediction markets could extend to scenarios where lower-level employees could potentially misuse information.

A company’s code of conduct or ethics (the “Code”) generally applies enterprise-wide and may be a better source to primarily address prediction market activity more broadly. For instance, a Code could be revised to:

• Reinforce that employees may not use confidential information for personal gain in any form;
• Clarify that wagering, betting, trading, or engaging in any transactions based on inside information is prohibited;
• Capture misconduct that may not fall squarely within federal securities law but that still violates fiduciary duties or company policy.

Consider Incremental Changes to Insider Trading Policies

As discussed above, many insider trading policies narrowly prohibit trading in a company’s own securities and, in some cases, derivatives or hedging instruments tied to company securities. Fewer policies explicitly address event-based contracts referencing the company, markets that do not require trading in the company’s stock, or trading on platforms outside of traditional broker-dealers and exchanges.

As prediction markets expand, companies should consider clarifying that trading on the basis of MNPI is prohibited regardless of the form of the instrument used to monetize the information. To the extent a company’s Code is updated as described above, companies should consider expressly cross-referencing relevant provisions of the Code in their insider trading policy. In addition, while prediction market activity could conceivably be addressed in a Rule 10b5-1 trading plan, companies may not wish to be viewed as approving or even encouraging employee use of prediction markets. Further, the event-driven nature of prediction market contracts could also make Rule 10b5-1 coverage unworkable.

Revisit Securities Trading Policies

Prediction market activity of employees can be difficult to monitor. While many companies have developed robust monitoring systems for transactions in company securities through broker account disclosure requirements and pre-clearance procedures, those systems are unlikely to cover prediction market activity.

To better enforce compliance, companies should consider requiring employee disclosure of the existence of any prediction market or online wagering accounts. In some instances, such as in highly regulated industries, an outright prohibition on maintaining prediction markets accounts may be a prudent approach.

Annual or quarterly certifications confirming that employees have not traded in company-related prediction contracts while in possession of material nonpublic information could also be implemented to reinforce expectations and provide a record of compliance efforts.

Update Training Materials and Certification Requirements

Finally, and perhaps most simply, vigilance and education can serve as a deterrent. Companies should update their training materials to ensure employees are aware of the risks and potential consequences of insider trading on prediction markets.

Conclusion

While the law of prediction markets evolves, companies should not sit by idly. A proactive approach is recommended to prevent potential situations that could result in employees misappropriating corporate information for their own benefit. Companies should carefully assess the adequacy of their internal policies and procedures and take necessary steps to address potential fraud on prediction markets.

[1] Commodity Futures Trading Commission, Press Release No. 9183-26 (Feb. 2026).

[2] CFTC Enforcement Division Issues Prediction Markets Advisory | CFTC.

[3] N.Y. Gen. Bus. Law §§ 352–353.