Prediction markets have made headlines of late, with contracts tied to elections, sports, geopolitics and other real-world events drawing broader participation and higher volumes. But as these venues scale, operators are confronting some foundational questions: who should be allowed to trade, and what constitutes an unfair information advantage?
Unlike traditional financial markets, insider status in prediction markets isn’t confined to corporate hierarchies. It can encompass athletes, officials, election workers, consultants and data vendors – really, any individual who may directly influence outcomes or possess non-public insight that can materially move prices.
To explore how compliance teams should think about these challenges, Eventus Global Head of Regulatory Affairs Joe Schifano sat down for a conversation with two subject matter experts from Akin, a leading international law firm:
- Jim Benjamin, Partner and leader of Akin’s white collar defense and global investigations practice, specializing in insider trading and market manipulation cases.
- Jack Murphy, Senior Counsel focused on commodities, derivatives and digital asset enforcement, and former trial attorney in the U.S. CFTC’s Division of Enforcement.
The conversation covered a range of topics related to participant eligibility, information advantage and supervision in prediction markets, including how operators should think about restricted participants, evolving definitions of non-public information and what regulators are likely to expect from designated contract markets (DCMs) as these venues continue to scale.
Prediction markets dramatically expand the definition of “insider.” The people closest to an outcome aren’t just executives or board members – they may be referees, campaign staff, contractors or vendors. That makes participant eligibility less straightforward than in traditional markets.
Joe Schifano: Prediction markets blur the line between ordinary participants and people who can influence outcomes. In the absence of bright-line rules, how should operators think about who to restrict?
Jack Murphy: The universe of people with potential access to inside information or the ability to influence an outcome is enormous, and constantly changing depending on the contract. Marketplaces and some vendors are making progress in wrapping their arms around this issue, but given the sheer size of the environment, you can’t realistically identify everyone ahead of time.
This can’t be solved purely with upfront restrictions; both pre- and post-trade have a role to play. Onboarding and KYC are critical focus areas, as they help market operators understand who their customers are, their affiliations and where conflicts might exist. Then surveillance looks for unusual behavior after the fact. You deter, you monitor and you investigate. That combination is what makes a framework defensible, even if it’s not bulletproof on day one.
Jim Benjamin: While the universe of potential insiders is much larger, the fundamental issue is similar to that faced by traditional exchanges. They don’t assume they can prevent every instance of insider trading. They gather enough identity information to investigate effectively and rely on anomaly detection to surface activity that doesn’t fit historical patterns. That’s how supervision works in practice.
Schifano: From an operator’s perspective, it really comes down to connecting identity with behavior. You look at the chart – price movement, volume, what happened around a specific event – and then ask whether a particular account’s activity diverges from how the broader market behaved. Are they consistently trading ahead of resolution? Are they active only in certain contracts? That anomaly-based approach is often what surfaces risk.
Eligibility isn’t just a compliance issue – it also shapes legal exposure and market credibility. If participants believe those closest to outcomes have an unfair edge, confidence can erode quickly. Where operators draw the line today may be scrutinized very differently tomorrow.
Schifano: If a prediction market operator allows participants who are close to or capable of influencing a given outcome to trade on related contracts, what kind of enforcement or litigation risk does that create?
Murphy: A lot of it comes down to where you draw those lines. Most people would agree there should be restrictions around how professional athletes interact with these markets. But does an NBA employee get to trade contracts related to game outcomes? What about a contractor or a vendor? Those aren’t always easy calls.
To date, most of the scrutiny has been on individual bad actors. But that’s not necessarily the environment that’s going to exist a few years from now. As these markets grow and attract more retail participation, the focus on integrity and unfair advantages is only going to increase.
Benjamin: If there’s a scandal or a pattern of abuse, regulators won’t just look at who traded – they’ll ask what the venue did to supervise them. We’ve seen this play out before in other areas. Consider AML: there was a time years ago when enforcement actions were focused predominantly on the criminals themselves, and over time it shifted heavily onto the intermediaries. Now the penalties are measured in the billions. That history is instructive. Firms that wait for perfect guidance tend to be the ones that get hit the hardest. You’re never going to catch every insider, but regulators expect you to make a serious effort.
Schifano: There’s a business element here, too. You don’t want to be the venue people think is rigged. You want to be the one participants trust. If traders believe the deck is stacked against them, liquidity leaves quickly.
If eligibility is one side of the equation, information is the other. In prediction markets, the “edge” traders seek is often informational by design – which makes the legal boundary harder to define.
Schifano: In prediction markets, information itself is the product. As operators tailor their surveillance frameworks, how should they determine where legitimate research ends and unfair advantage begins?
Benjamin: At a baseline level, you have to decide what kind of market you’re trying to run. Is the goal to reward pure prediction ability at any cost, including people trading on insider information? Or is the goal to operate a well-regulated financial market that participants view as fair? If it’s the latter – and for most regulated venues it is – then protection becomes paramount. Federal regulators will care, state attorneys general will care and plaintiffs’ lawyers will care. Enforcement tends to come from multiple directions.
The dividing line usually comes back to material non-public information. You can absolutely have an information advantage. Research, analysis, even obscure public data is fine. But once the information is confidential and you’ve assumed a duty not to use or share it – an employment relationship, an NDA, something like that – that’s where it starts looking much more like traditional insider trading.
Murphy: Public availability is a key standard here. Even if the information is hard to find, if it’s out there, it’s generally fair game. There’s a difference between being better informed and being unfairly informed. If you’re a business owner and you learn something because it comes directly from your own operations – your own orders, your own customers, your own inventory – that’s your information to act on. But if you’re trading because you got wind of someone else’s confidential decision before the market does, that’s a different category entirely.
As prediction markets scale, the first integrity flashpoints are likely to be behavioral, not philosophical. Regulators and plaintiffs will gravitate toward patterns that are easy to demonstrate and hard to explain away. That shifts the burden onto operators to prove they weren’t passive bystanders.
Schifano: As these markets mature, what kinds of information-advantage behavior do you expect regulators or plaintiffs to challenge first?
Benjamin: Consistent patterns. Accounts that repeatedly trade just ahead of announcements or resolution events, or that have abnormally short holding periods, or that show unusually high success rates tied to non-public developments. Timing can be as important as source. Regularly being on the right side of binary outcomes immediately before new information becomes public tends to attract attention.
Schifano: Given these gray areas, how important is it for operators to detect and document suspicious timing or behavioral patterns?
Murphy: It’s extremely important. Even if the standards aren’t perfectly defined, you want to show that you’re monitoring, investigating and escalating concerns. Regulators understand you won’t catch everything. What they look for is evidence of a serious, good-faith effort – systems in place, alerts generated and issues reviewed. That documentation matters, and will only become more important as this market grows.
Schifano: If you were advising a prediction market operator today, what assumption would you push back on most strongly?
Murphy: That today’s relatively light-touch environment will last forever. The pendulum always swings back. These markets have all the ingredients for future scrutiny – rapid growth, retail participation, high-profile outcomes. It’s not hard to imagine congressional hearings a few years from now asking what operators did to protect market integrity.
Building surveillance and compliance infrastructure takes time. Operators who start investing now will be in a much better position than those trying to retrofit controls later.
Our thanks to Akin for sharing their time and perspective. To learn more, visit their website. For additional commentary and resources from Eventus on market and product evolution, explore our blog or request a demo.