The U.S. Commodity Futures Trading Commission (CFTC) has issued a new advisory about the dangers of insider trading and fraud on prediction markets, in the wake of two enforcement actions against trading platform KalshiEX.
The move marks the latest effort of growing regulatory interest in a rapidly growing part of the online trading world, where users wager on the outcome of real-world events.
Prediction markets enable traders to place bets on the outcome of future events, such as elections, economic announcements, or policy choices, with prices set based on the collective expectations of traders about the likely outcome.
Although these markets are intended to operate as regulated financial markets, regulators are increasingly concerned that traders with access to non-public information may use these markets to gain an unfair advantage.
CFTC applies anti-fraud rules to prediction markets
In its advisory, the Commodity Futures Trading Commission highlighted that the regulation of prediction markets is the same as that of traditional derivatives markets, in terms of anti-fraud and anti-manipulation provisions.
The CFTC warned traders, employees, and insiders that using non-public or privileged information to make profits from event contracts could be considered illegal insider trading.
The advisory comes after two enforcement actions related to trading on KalshiEX, although the regulators did not consider the problem to be isolated incidents.
Rather, the CFTC explained that the two cases were examples of the vulnerabilities that exist in prediction markets, especially as the number of traders increases and event contracts become more sensitive.
Regulators warn against trading on nonpublic information
Regulators are particularly concerned about situations in which people with early access to government information, business decisions, or policy outcomes might be able to affect or trade on prediction market contracts before the information is made public.
Such activity could lead to a lack of integrity in the market and a loss of confidence in platforms that are highly dependent on transparent price discovery.
The warning also serves as advice to operators of prediction markets, encouraging them to improve their monitoring systems and controls to identify trading activity that is suspicious.
The exchanges are supposed to be watching for users who are acting suspiciously and are supposed to have adequate protection in place to prevent manipulation or fraud.
The warning is part of the CFTC’s overall strategy to provide clear guidance on compliance as prediction markets continue to enter mainstream finance. As interest in event trading continues to grow, regulators seem determined to ensure that these markets develop in a tightly controlled manner.