Insider traders are getting caught. It's still not enough for prediction market critics. [Business Insider]

In the high-stakes world of prediction markets, the line between informed speculation and illegal insider trading has never been thinner—or more heavily policed. Over the past twelve months, regulators and platform operators have publicly nailed several high-profile cases of traders using non-public information to profit on events ranging from Federal Reserve decisions to corporate earnings surprises. Yet, for all the enforcement victories, a growing chorus of critics argues that the existing framework remains fundamentally flawed. The question they’re asking is not whether insider trading is being caught, but whether the entire model of betting on real-world events is structurally prone to abuse.

The recent crackdown: a new era of enforcement

The most striking development came in early 2024, when the Commodity Futures Trading Commission (CFTC) charged a trader with using confidential government data to place winning bets on interest rate outcomes. The case was a landmark: it marked the first time the agency had applied traditional securities insider trading laws to a prediction market contract. Shortly after, a separate investigation by a major exchange uncovered a ring of users who had bribed a low-level employee at a pharmaceutical company to leak trial results before they were publicly announced. Both cases resulted in fines, account freezes, and in one instance, criminal referral.

These actions have sent a clear signal. Prediction markets, once seen as a Wild West of speculative bets on everything from election results to weather patterns, are now being taken seriously as financial instruments. The CFTC’s willingness to use its enforcement powers has forced platforms to implement stricter Know Your Customer (KYC) protocols and real-time trade surveillance. “We are seeing a shift from reactive to proactive enforcement,” said a former SEC attorney who now consults for prediction market startups. “The message is: if you use inside information, you will get caught.”

Why critics remain unconvinced

Despite these wins, skepticism runs deep. Critics point to a fundamental asymmetry: traditional securities markets have decades of legal precedent, clear definitions of what constitutes insider trading, and a robust system of civil and criminal penalties. Prediction markets, by contrast, operate in a regulatory gray zone. Many contracts are structured as “event derivatives” or “cash-settled binary options,” which fall under CFTC jurisdiction but lack the precise legal guardrails of stocks or bonds.

The problem, argue academics and policy watchdogs, is that the very nature of prediction markets incentivizes the exploitation of edge cases. “If you can get a piece of information 30 seconds before the rest of the market, you can make a fortune,” said Dr. Lena Hart, a finance professor at Georgetown University. “But proving that the information was non-public and material is incredibly difficult when the underlying events are things like ‘Will the FDA approve Drug X by March 31?’—where the source might be a leaked email, a social media post, or a casual conversation at a conference.”

Critics also note that the enforcement actions, while headline-grabbing, only scratch the surface. A 2024 audit by a consumer advocacy group estimated that up to 15% of high-volume prediction market trades may involve some form of non-public information. The true number is likely higher, since many trades are executed through offshore platforms or using pseudonymous accounts that are difficult to trace. “Catching a few bad actors is not the same as deterring the behavior,” Hart added. “As long as the potential payoff outweighs the risk of getting caught, the problem will persist.”

The structural dilemma: transparency vs. abuse

Proponents of prediction markets argue that the system is self-correcting. They point to the “wisdom of the crowds” effect, where diverse participants with access to different information collectively produce accurate probabilities. Inside information, they claim, actually improves market efficiency by incorporating private knowledge into prices faster. But even among supporters, there is growing unease about the implications of unchecked insider trading.

Consider the case of a high-profile market on a major election. If a campaign strategist leaks internal polling data to a friend, who then places a large bet, the market price shifts artificially. This not only distorts the signal for other participants but also erodes public trust in the market’s integrity. “Prediction markets are supposed to be better than polls because they aggregate real money,” said a trader who requested anonymity. “But if you can’t trust that the price reflects genuine belief rather than a leaked memo, then what’s the point?”

Platforms have responded by tightening their rules. Some now require users to sign affidavits that they do not possess non-public information, while others have adopted “cooling-off” periods for trades involving sensitive events. But these measures are largely voluntary. “The platforms are in a difficult position,” notes the former SEC attorney. “They want to maintain user trust and avoid regulatory penalties, but they also don’t want to scare away the very traders who make their markets liquid.”

Regulatory uncertainty looms

The broader issue is that prediction markets still lack a coherent legal framework. The CFTC has issued guidance on event contracts, but it has not yet established clear rules on what constitutes “insider information” in this context. Is a leaked earnings report the same as a leaked FDA decision? Should traders be punished for using information that is technically public but obscure—like a buried government database? The absence of answers creates a legal vacuum that regulators are only beginning to fill.

Congress has shown interest, with several bills introduced that would explicitly classify prediction market contracts as regulated securities or commodities. However, progress has been stalled by partisan disagreements over the social utility of betting on elections and other public events. Meanwhile, the enforcement actions continue—but critics warn they are a band-aid, not a cure.

The bottom line

Insider traders are indeed getting caught. The recent cases have sent a chill through the community, and many traders are now more cautious about the sources of their information. But for the skeptics, the problem is not one of enforcement capacity—it is one of design. Prediction markets, by their very nature, reward those who can access information faster and more quietly than others. Until that incentive is addressed, either through draconian regulation or a fundamental restructuring of how markets operate, the critics will have a point. The cat-and-mouse game continues, and the mice are getting smarter.

Ahmed Abed – News journalist