EVENT CONTRACTS UNDER SCRUTINY: INSIDER TRADING RISK IN PREDICTION MARKETS
Prediction markets were built to monetise information. The sharper the insight, the greater the potential gain. But when the most valuable information is confidential, held by government officials, corporate executives, and media and content creators, the line between smart trading and unlawful activity is blurred.
Once considered niche forecasting tools, prediction markets moved into the mainstream during the 2024 US presidential election, as participants sought to manage exposure in a volatile political environment. Their pricing is cited in media coverage (with platforms entering high-profile partnerships to integrate prediction market data directly into news coverage) and debated in political and financial circles. But sustained growth will depend on whether participants view these markets as legitimate – that is, whether the prices are seen as reflecting aggregated market knowledge and not insider access.
With US federal prosecutors signalling potential fraud prosecutions and regulators confirming that insider-style conduct in prediction markets falls within their existing enforcement authority, the legal limits of trading on non-public information in these markets may soon be defined.
The doctrinal gap: insider trading outside securities law
Prediction markets offer binary event contracts that settle at $1 if the specified outcome occurs. Traded on exchange platforms where buyers and sellers are matched, the contract price reflects the market’s assessment of the probability of that event. In the US, these contracts are regulated as swaps under the Commodity Exchange Act (CEA). Unlike securities law’s well-developed insider trading framework – found in section 10(b) of the Securities Exchange Act and Rule 10b-5 – the CEA relies on broad antifraud and anti-manipulation provisions that require deception, manipulation or breach of duty.
Apr-Jun 2026 Issue
Venable LLP