Prediction markets are entering a new phase. After a period defined largely by novel contract launches, jurisdictional disputes and public debate over what these venues should be allowed to list, the focus is shifting toward a more familiar regulatory question: how will these markets be supervised, and what happens when misconduct emerges?
That shift has been underscored by recent signals from the CFTC, including remarks from Division of Enforcement Director David Miller, staff guidance, an advance notice of proposed rulemaking and an increasingly active posture in litigation. Taken together, those developments suggest that prediction markets are no longer being treated as a theoretical edge case.
To explore what that means for operators, compliance teams and market participants, Eventus Global Head of Regulatory Affairs Joe Schifano sat down with two subject matter experts from Sidley Austin:
- Peter Malyshev, Partner, Sidley Austin
- Ian McGinley, Partner, Sidley Austin
The conversation covered the CFTC’s evolving posture, the legal boundaries of insider trading in event contracts, the relationship between self-certification and enforcement and the integrity risks the industry may still be underestimating as these markets continue to mature.
Recent statements and actions from the CFTC suggest that prediction markets are no longer being observed from a distance. The question now is how they intend to shape the market’s next era.
Joe Schifano: There’s been a lot to digest lately between Director Miller’s speech, the staff guidance, the proposed rulemaking activity and the agency’s litigation posture. Broadly speaking, how should market participants interpret this moment?
Ian McGinley: The clearest message is that the CFTC is watching. Director Miller’s speech was significant not just because he said the agency is focused on conduct in these markets, but because he laid out the legal theories it could use. That usually tells you something. It suggests the agency wants the market to understand the framework in advance, and it suggests enforcement activity is likely.
At the same time, there’s a parallel message to platforms: you are the first line of defense. The agency is making clear that designated contract markets need to police their own venues in the first instance. The CFTC may step in, but it expects operators to have done the work first.
Peter Malyshev: I’d frame it as refinement rather than a sudden reversal. Prediction markets are still relatively new in their current form. A few years ago, this was not yet a mature market. The CFTC was cautious, which made sense. Now the market has grown, the states have become more active and the agency is signaling that it intends to be an active participant in shaping the rules of the road.
The more recent actions also show a more nuanced approach. Rather than trying to treat all event contracts as one category, the CFTC appears to be moving toward a more case-by-case analysis. That is a more sophisticated place for the discussion to be.
One of the most persistent misconceptions in this space is that insider trading is unavoidable in prediction markets. That idea often collapses distinct legal concepts into one broad fear.
Schifano: Director Miller pushed back pretty directly on the idea that insider trading is simply inevitable in these markets. Is that narrative rooted in real legal ambiguity, or is it overstated?
McGinley: It’s overstated, but part of the confusion comes from the fact that commodities law has always treated information differently than securities law. In commodities markets, the classical insider trading theory generally does not apply in the same way. A farmer can know something non-public about his own crops and trade futures. That is not inherently unlawful.
Where the CFTC does have a path is through the misappropriation theory of insider trading. Rule 180.1 prohibits the misappropriation of material non-public information. That is a recognizable insider trading concept, even if some practitioners prefer to separate the terminology. If someone steals or wrongfully uses confidential information belonging to another source, that can absolutely be actionable.
Malyshev: Exactly. Commodity markets have always involved people trading with knowledge others may not have. That is part of how those markets function. The key distinction is not whether someone has an informational advantage in the abstract. It is whether they misappropriated information they had no right to use.
That principle is not unique to prediction markets. Whether you are talking about crude oil, carbon credits or an event contract, you cannot take someone else’s confidential information and trade on it.
In some ways, prediction markets make practical analysis more complicated. Contract structure can make misconduct easier to imagine and, in some cases, easier to execute.
Schifano: Event contracts obviously look different from traditional commodity contracts. How does that affect the analysis?
Malyshev: The best way to think about it is that the underlying legal framework remains the same, but the economics are very different. A gold contract reflects thousands of inputs. A sports or entertainment event contract may turn on a single outcome, a single person or a single decision. That can make influence and misuse of information much more concentrated. The real novelty is that the contract design may create a much tighter relationship between one fact and the contract outcome.
McGinley: This is where it becomes important not to blur informational advantage with insider trading. Insider trading law is not a general fairness doctrine. It is not about eliminating all asymmetries of information. It is about misuse of information in breach of a duty.
If someone knows something the market does not know, that alone is not enough. The regulator still has to identify the duty. That said, an exchange can always choose to go further through its own rulebook and say that people connected to an event cannot trade that contract. That is often a business and market integrity decision as much as a legal one.
If insider trading is one concern, manipulation is another. In some event-driven contracts, the two can sit much closer together than they do in more traditional markets.
Schifano: From a surveillance perspective, one of the big differences here is that liquidity, concentration and patterns over time matter enormously. How should firms think about that?
Malyshev: Manipulation becomes a more realistic concern when the outcome is narrow and influenceable. One athlete, one performer, one match or one decision-maker can matter much more in these contracts than in a broad commodity market. That does not mean the contract is inherently improper, but it does mean the analysis around susceptibility to manipulation becomes much more important.
Schifano: And from a market surveillance perspective, that’s where pattern and practice start to matter. One suspicious trade may not tell you much. But when you observe repeated timing, repeated account behavior or activity across related contracts, it becomes much easier to identify something worth investigating.
Detection is unlikely to come from a single source. Enforcement agencies have multiple ways to learn about misconduct, and the market should expect them to use all of them.
Schifano: When the CFTC, DOJ or other regulators start bringing cases in this space, what do you expect the typical triggers to be?
McGinley: There will likely be several buckets. One is self-reporting and cooperation. The CFTC has made clear that those remain priorities, both for resolving matters and for surfacing new ones. Another is the whistleblower channel, which still has real significance. Then there is direct surveillance: the agency has its own market surveillance capabilities, it is watching for incidents and it is obviously paying attention to public reporting.
And in some venues, especially where activity is happening on-chain, analytics and tracing tools may become another source of insight. So I would not assume the agency is dependent on just one avenue.
The CFTC’s “first line of defense” message also raises an operational question for platforms: what does responsibility look like in practice, and what happens if a venue gets it wrong?
Schifano: What is the real risk here for DCMs? What should compliance teams be pointing to internally when they push for resources and stronger controls?
McGinley: The carrot is cooperation and self-reporting. The stick is what we’ve seen in many other contexts: failure-to-supervise type theories, or cases centered on weak controls, weak escalation or weak internal enforcement. If a regulator asks what the platform did to prevent or detect misconduct, the operator needs to be able to answer that with something concrete.
That means policies, training, surveillance, investigations and internal disciplinary mechanisms. Regulators understand that you cannot stop everything. But they do expect a serious, documented effort.
Malyshev: And for newer entrants, that starts with understanding what kind of entity they are trying to become. Some firms still approach this as though they can simply launch event contracts and see what happens. But if you want to operate a U.S. prediction market, you are talking about becoming a registered DCM. That is a highly regulated status. The Commodity Exchange Act has not been suspended for event contracts.
As prediction markets evolve, the industry cannot assume the present environment will remain static. The products are likely here to stay. The harder question is what kind of supervisory architecture will surround them.
Schifano: Looking ahead, how do you see all of this shaping the evolution of prediction markets? What blind spots is the industry still underestimating?
Malyshev: I do not think event contracts are going away. They are too useful, and in many cases too valuable, for that. But the framework around them is going to get more nuanced. The federal role will remain central, but states will continue to assert themselves, and private actors such as sports leagues and other stakeholders will increasingly have views as well. It will not be black and white.
McGinley: I’d add that the market should assume enforcement is coming, and probably first against individuals. But over time, the real question for platforms will be whether they can show they approached these products in good faith, with real controls and real supervision.
Our thanks to Sidley Austin for sharing their time and perspective. For additional commentary and resources from Eventus on market and product evolution, explore our blog or request a demo.