SEC Steps Up Scrutiny of Prediction Markets Over Insider Trading

CoinDesk reports that the U.S. Securities and Exchange Commission is warning prediction markets offering contracts tied to corporate earnings and operating performance that they could face enforcement action for insider trading, fraud and market manipulation. The agency is monitoring those risks across prediction platforms. David Woodcock, who heads the SEC’s enforcement division, said contracts linked to a company’s profitability and performance data may fall within the SEC’s remit. Bloomberg reported on Oct. 29 that Woodcock said the SEC is watching activity on prediction platforms and expects to act on potential securities violations. He said the agency is monitoring the sector closely and must be ready to act if fraud or other securities violations occur, adding that enforcement actions will certainly come. He did not identify companies or announce new charges. Regulators recently approved Cboe options tied to company performance metrics, including earnings and sales data. The Commodity Futures Trading Commission continues to regulate federally registered prediction exchanges while fighting states over gambling laws. The agencies have sought public input on how to define derivatives that may fall under both agencies’ jurisdiction. The SEC’s focus is chiefly on contracts that let traders bet on financial results or key performance indicators. These can be tied to quarterly earnings, sales data or other operating metrics of publicly traded companies. The SEC oversees securities markets; the CFTC oversees many derivatives. When a contract’s outcome depends on a public company, jurisdiction can become unclear. Regulators previously approved a Cboe Global Markets proposal involving binary options tied to corporate performance metrics. The contracts let traders take positions on outcomes such as Citigroup earnings per share or Apple iPhone sales revenue. In its approval order, the SEC determined the proposed instruments are securities options under federal law. That ruling applied only to Cboe’s specific product, not to all company-performance contracts. For months, the SEC and CFTC have studied how existing derivatives law applies to newer financial products. In June, they sought public comment on definitions of swaps, security-based swaps and products with characteristics of both. Their concerns include market monitoring, law-enforcement cooperation and contracts that may fall under overlapping jurisdictions. SEC Chairman Paul Atkins said both agencies aim to set clearer rules for event-based products, including cases where traditional exchanges and newer trading platforms offer similar tools. The CFTC later took additional steps. On Oct. 19, an interim rule took effect excluding casino-style gambling products from the definition of swaps. A separate proposed rule would explicitly include certain event contracts tied to sports, politics, culture and weather in the swaps definition. Public comment on that proposal ends Nov. 18. The CFTC remains the primary regulator for federally registered prediction exchanges, including the U.S. operations of Kalshi and Polymarket. Its jurisdiction is at the center of legal fights with states that argue some event contracts, especially sports-related ones, are illegal gambling. On Oct. 26, the agency sued Utah to stop state officials from enforcing gambling restrictions on federally regulated exchanges. crypto.news reported that similar federal-state conflicts have emerged in nine other states. Kalshi has separately challenged state-level restrictions in multiple jurisdictions. A September appellate ruling involving Ohio and Tennessee followed earlier decisions that reached different conclusions on the relationship between federal derivatives law and state gambling rules. Reuters reported on Oct. 27 that the CFTC is investigating whether Polymarket is complying with restrictions in its 2022 settlement agreement on U.S. users accessing its offshore platform. The investigation covers geolocation controls, advertising and customer protection. Polymarket has said it prohibits users from circumventing geographic restrictions. Federal authorities have previously brought cases against traders accused of profiting from privileged information on event contracts. Bloomberg reported that the CFTC advanced enforcement actions related to alleged manipulation and improper trading involving Kalshi in 2026. In April this year, federal prosecutors and regulators accused a U.S. soldier of making more than $400,000 by betting on Polymarket on the arrest of former Venezuelan President Nicolás Maduro using classified information. The defendant has pleaded not guilty and the case is continuing. New York City officials also reviewed marketing practices at several prediction platforms, including allegations involving the promotion of insider trading. Kalshi and Polymarket say they prohibit insider trading, monitor suspicious activity and cooperate with regulators when potential misconduct arises.