Prediction Markets and the Limits of Insider Trading Law: New Analysis in Law360
Law360 has published an Expert Analysis by R Tamara de Silva, "CFTC Trading Rule Can't Police Prediction Markets Yet." It addresses a question that will shape derivatives enforcement for years to come: the government is now policing insider trading on platforms like Kalshi and Polymarket using a legal framework that was never designed for them.
The full article, with citations to the case law and the regulatory record, is available as a PDF below. What follows is the argument in plainer terms.
The idea of an "insider" does not survive the move to prediction markets
Insider trading law functions in the stock market because the people who hold confidential information can be named. They are officers, directors, employees, and the lawyers and bankers who advise them. The law draws a boundary around that group: trade on what you know, and you have breached a duty.
Prediction markets dissolve the boundary. When a contract settles on whether a war begins, whether a candidate prevails, or whether a government acts, the person with the decisive information is not a corporate officer. They may be a soldier, a campaign volunteer, a congressional staffer, or the spouse of a contractor who heard something at dinner. The recent enforcement actions bear this out, from the Army Special Forces soldier charged with trading on classified intelligence to the video editor disciplined for trading on content he knew was coming. For some of these people the law supplies a clear answer. For others it supplies none.
Skill and misconduct are not the same thing, but the platforms cannot tell them apart
This is the heart of the piece. A platform usually cannot distinguish between a trader acting on stolen information and a trader who simply reads the public world more accurately than everyone else. Unable to tell the two apart, the platforms have fallen back on the only thing they can measure with confidence, which is who wins.
That is the logic of a sportsbook managing its risk, not of a market operating under rules participants can know in advance. Sportsbooks limit or ban bettors who win too often, and a sportsbook may do so because it is a private business protecting its own money. A market regulated by a federal agency is supposed to run on rules a participant can know before placing a trade. "Do not win too often" is not such a rule. Worse, it treats the genuine insider, the gifted analyst, and the lucky amateur as a single category.
Penalizing the winners undermines the only thing these markets claim to offer
One of the strongest arguments for prediction markets is that they aggregate information and forecast events with notable accuracy. That value depends on the most capable and best-informed participants remaining in the market and being rewarded for being right. If sustained success is treated as a sign of wrongdoing and those participants are driven out, the market's informational quality declines, and it begins to resemble the activity its critics describe rather than the price-discovery mechanism its supporters envision.
The underlying failure is that no one ever defined the rules
The Securities and Exchange Commission spent roughly eighty years constructing the law of insider trading, decision by decision, until the boundaries were reasonably clear. Congress handed the Commodity Futures Trading Commission a comparable tool in 2010. The agency adopted the language but never built the body of doctrine to give it meaning. Nearly fifteen years on, there is still almost no case law marking the limits of insider trading in commodity and prediction markets.
Until the courts supply that law, or Congress writes it, enforcement will proceed by improvisation. And improvisation is precisely how a market ends up punishing its winners, because tallying wins is easier than defining the conduct the law forbids.
Read the full analysis
The complete article, including the supporting case law and regulatory citations, appears in Law360 and is available as a PDF below.
R Tamara de Silva is the founder and managing attorney of De Silva Law Offices, LLC, a Chicago financial regulatory law firm focused on CFTC and NFA compliance, securities law, derivatives, and event contracts. This article is for general information and is not legal advice.