Prediction Markets in the Cross-Hairs

On a sleepy Saturday in February, sports traders on prediction markets resigned themselves to another ho-hum weekend on the sports calendar.

Twenty days earlier, the Seattle Seahawks had delivered a defensive masterclass in Super Bowl LX. March Madness, the largest month-long sports betting event each year, was still weeks away. So was opening day of the 2026 MLB regular season, a spring rite of passage that kicks off months of wagering for sharp bettors across the country.

Astute traders, however, capitalized on a geopolitical event that roiled global financial markets worldwide. On February 28, the U.S. military in conjunction with Israel pummeled Iran with almost 900 missile strikes over a period of 12 hours. Within hours, U.S. President Donald Trump announced that one strike led to the killing of Iran Supreme Leader Ali Khamenei, whose death was later confirmed by the Iranian government.

Unlike other major Middle Eastern conflicts over the last 25 years, the invasion came with a wrinkle as traders who timed the market correctly emerged with large, six-figure payouts. At least six accounts on Polymarket recorded aggregate trading profits of $1.2 million, with a single trade netting more than $500,000.

Across the nation, a wide swath of disparate parties—comprised of Wall Street analysts, legislators on Capitol Hill and federal prosecutors—largely agree that insider trading should be curbed. Nevertheless, the rise of prediction markets has created a new opportunity for nefarious investors to take advantage of inside information for financial gain.

“Polymarket has become an illicit market to sell and exploit national security secrets unlike any in history.”

—Connecticut Senator Richard Blumenthal in an April 9 letter to Polymarket

The loopholes have put regulators in the precarious position of acting swiftly to establish robust guardrails on market manipulation as trading activity on prediction markets proliferates.

Trading on War

The Iranian trades were not the first in recent months in which individuals on prediction markets made a profit from the U.S. military invasion of a foreign nation. Just before the new year, an unidentified trader on Polymarket made a series of wagers on the ouster of Venezuela President Nicolas Maduro. Altogether, the trader invested about $34,000 that Maduro would be unseated from office by January 31.

The trader first entered into the financial derivatives in the final week of 2025, before steadily increasing the size of the wagers during the opening week of the new year. His last trade, apparently placed hours before U.S. special forces entered a presidential palace in Caracas, still carried relatively low odds around 10 percent. Consequently, his payout—$436,759.61—brought a handsome return of nearly 13X from his initial investment. The transaction also raised significant red flags for insider trading.

On Capitol Hill, New York Rep. Ritchie Torres (D–Bronx) already had a bill in the works related to insider trading on prediction markets. The Maduro trades, however, prompted him to accelerate his push. While Torres’ bill is brief, it is also pointed. HR 7004 would make it unlawful for a so-called “covered individual” to engage in a financial transaction on a prediction market if they possess information related to the trade that is not readily available to the public.

Insider trading in the United States dates back more than 200 years, to the turn of the 19th century. In the 1790s, William Doer, a Treasury Department undersecretary, used his knowledge of department policies to inform his leveraged trades on deeply discounted bonds. Doer’s activity is largely credited for leading to the Panic of 1792.

 Decades later, two financiers, Jay Gould and James Fisk, used inside information through their relationship with President Ulysses Grant’s brother-in-law to allegedly manipulate the gold futures market. The attempt putatively resulted in Black Friday, a market panic of 1869.

Oddly enough, a recent NBA case has drawn parallels with the insider trading incidents on non-sports trades occurring on prediction markets. Damon Jones, a defendant in the Brooklyn illegal sports betting case, is a former teammate of LeBron James in Cleveland. Following Jones’ retirement as a player, he joined James in Los Angeles as an unpaid assistant with the Lakers. Jones is accused of disseminating non-public material information (NPMI) on a James injury to an individual who allegedly wagered off of it. A spokesman for Torres told GGB Magazine that, had the Maduro trader utilized inside information in a similar fashion as the NBA allegations, he believes the activity would be captured in the bill.

Two operators, Kalshi and Polymarket, have garnered the most headlines in 2026 regarding policies on insider trading. Prediction markets in general have become ubiquitous, with sportsbooks such as DraftKings, FanDuel and Fanatics all launching platforms in the last 12 months. On the online brokerage side, Robinhood has expressed concern with insider trading as the company pulled some contracts in April amid anxiety on market manipulation.

A New Sheriff in Town

Michael Selig was not Donald Trump’s first choice to head the federal agency that regulates derivatives. The 47th president of the United States initially nominated Brian Quintenz to serve as the chairman of the U.S. Commodity Futures Trading Commission (CFTC). But as a vote on Quintenz neared over the summer, his nomination reportedly stalled amid pushback from the Winklevoss twins.

Selig had experience at the CFTC in the past as a clerk for former commissioner Christopher Giancarlo. By last fall, the CFTC intensified collaborative efforts with the U.S. Securities and Exchange Commission. One hearing in September focused on harmonization between the two agencies. Selig appeared as a natural fit to head the CFTC since his appointment last year as the head of the SEC’s cryptocurrency taskforce. Despite heavy grilling from a faction of Democratic senators at his confirmation hearing, Selig emphasized the importance of ensuring that markets operated relatively free of manipulation.

“If confirmed, I would welcome the vital responsibility to oversee the stability and security of these markets and protect consumers from fraud and manipulation.”
—Michael Selig, prior to his appointment as chairman of the U.S. Commodity Futures Trading Commission

“If confirmed, I would welcome the vital responsibility to oversee the stability and security of these markets and protect consumers from fraud and manipulation,” Selig said.

Despite a partisan split, Selig was still confirmed. By the following spring, he had conducted an extensive media blitz, giving interviews to ESPN, CNBC, The New York Post, Fox Business and The Wall Street Journal, among others. He opened March with an appearance at the Milken Institute’s 2026 Future of Finance conference. There is some irony in the appearance, given that Milken Institute Chairman Michael Milken faced criminal charges in the late 1980s for a slew of securities violations, including insider trading.

In remarks at the opening plenary, Selig noted that the CFTC planned to set clear standards on the types of prediction markets that could be self-certified by operators. He also reiterated that the CFTC planned to move forward with an advanced notice of proposed rulemaking on the asset class, adding that it would set the stage for more fulsome prediction markets rulemaking.

Optics and Integrity

Later in the month, the CFTC made history when it signed a memorandum of understanding (MOU) with Major League Baseball on an integrity framework regarding prediction markets. After lengthy discussions with MLB Commissioner Rob Manfred, Selig announced that the CFTC reached a partnership with the league to exchange information in protecting the integrity of baseball, along with related prediction markets. The CFTC made history in becoming the first agency from the federal government to sign an MOU with a Top 5 U.S. professional sports league.

“Through this partnership, the CFTC is well-positioned to add additional tools to protect our markets from fraud, manipulation and other abuses,” Selig wrote. “Thanks to MLB and Commissioner Manfred for working with us to protect the integrity of these growing markets.”

 Integrity is a sensitive topic these days for Major League Baseball. Two Cleveland Guardians pitchers, Emmanuel Clase and Luis Ortiz, await trial in a high-profile micro-betting case. Clase, a former MLB Reliever of the Year, allegedly rigged pitches for ball-strike wagering in at least four dozen games, including at least one pitch in the 2024 MLB Playoffs. In some instances, the alleged activity bordered on sheer absurdity as Clase bounced the pitches to a catcher to ensure a called ball.

The MOU came on the same day that Major League Baseball signed a multi-year agreement with Polymarket designating the company as the exclusive prediction market partner of the league. As part of the deal, MLB and Polymarket will establish a comprehensive integrity framework, which includes working together to restrict markets that present an integrity risk to MLB, such as individual pitches, manager decisions and umpire performance, according to the league. Furthermore, Polymarket will integrate integrity controls into its U.S. Rulebook to ensure all of its brokers are held to the same integrity standards, the league said.

 “The new agreements that we formed with Polymarket and the CFTC are imperative steps in proactively managing the new and rapidly growing prediction market space,” said Manfred in a statement. “Protecting the integrity of the game on the field is our top priority. By engaging in this community, we are able to work together to create clear boundaries with the goal of mitigating risk while providing fan engagement opportunities.”

Back to Iran

On Easter Weekend, Polymarket came under fire for listing an event contract on a U.S. fighter pilot whose jet had been shot down by Iranian forces days earlier. Initially, Polymarket listed the contract on whether the unidentified pilot would be found alive. The offering drew scrutiny from an irate Massachusetts congressman, who skewered the operator for listing a “dystopian death market.”

“They could be your neighbor, a friend, a family member,” wrote Rep. Seth Moulton, a Democrat from Massachusetts’ 6th District. “And people are betting on whether or not they’ll be saved. This is DISGUSTING.”

In response, Polymarket wrote on X that the operator took down the market “immediately,” after determining that the contract did not meet its integrity standards.

Sean Patrick Maloney, CEO of Coalition of Prediction Markets, agreed with Moulton’s position. Maloney, a former U.S. ambassador to the Organization for Economic Cooperation and Development, also spent at least a decade as a New York congressman representing the state’s 18th congressional district. There, he chaired the Commodity Markets and Digital Assets Subcommittee of the CFTC and served on the House Intelligence Committee.

“They could be your neighbor, a friend, a family member. And people are betting on whether or not they’ll be saved. This is DISGUSTING.”

—Massachusetts Rep. Seth Moulton, on a prediction market contract on the survival of a U.S. airman shot down in Iran

Maloney drew a distinction between prediction markets that are federally regulated by the CFTC and offshore platforms that are domiciled outside the U.S. While the CFTC is currently reviewing a Polymarket platform for trading in the U.S., the company also offers one beyond U.S. borders.

Placing wagers on the “misappropriation of classified information” could constitute a crime, Senator Richard Blumenthal (D–Connecticut) wrote in an April 9 letter to Polymarket.

“In practice, Polymarket has become an illicit market to sell and exploit national security secrets unlike any in history, and by extension a potential honeypot for foreign intelligence services watching for those same suspicious wagers,” Blumenthal wrote.

Legal Implications

Given the nascence of prediction markets, illicit activity surrounding insider trading still operates in somewhat of a gray area as it relates to event contracts. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFTC amended the Commodity Exchange Act in 2010 to prohibit fraud or manipulation in any transaction associated with the trade of a swap.

A year later, the CFTC finalized Rule 180.1, which prohibits fraud or deception in any transaction involving a swap and a broad swath of other financial derivatives.

Since then, the agency has relied upon the rule to levy enforcement actions based upon the misappropriation theory of insider trading, wrote Jay Sykes in a legal sidebar attached to Torres’ bill.

Kalshi, meanwhile, has adopted internal rules that prohibit insiders with access to material non-public information from trading on the insights. Kalshi defines an insider as a person who has “the ability to exert any influence on the subject of an underlying contract” or a “decision-maker” who has influence on the outcome of the underlying event. As a result, Kalshi’s rules prohibit a broader range of conduct than those covered in the misappropriation theory, Sykes wrote.

 Since the NFL season ended, both Kalshi and Polymarket have adopted enhanced protocols to maintain integrity throughout the markets on their platforms.

 “Our job as an exchange and the job of regulators” is to “flag these bad actors and detect and deter,” Kalshi CEO Tarek Mansour said in an interview with Axios. “You punish them when you find someone who did something bad.” Whether there is suspicious trading on a ballgame, the Academy Awards, or the invasion of a foreign country, the CFTC appears committed to investigating the matter to the fullest of its regulatory powers.

“A myth has spread that insider trading is permissible, or even encouraged, in the prediction markets,” said CFTC Enforcement Director David Miller in a March appearance at NYU Law School. “Prominent individuals in finance, media and particularly on social media have contended that insider trading law does not apply to these markets—not so.            

“We are aware of the speculation about insider trading. We are watching.”