Prediction markets are bending insider trading rules. But will they break them?
In 1983, the film Trading Places did far more than just catapult Eddie Murphy’s acting career.
When the billionaire Duke brothers are shown discussing an upcoming crop report, they confirm that their operative, Clarence Beeks, is already working to gather the report before its public release, providing audiences with a clear understanding of a specific type of financial fraud.
Insider trading.
So clear that in 2010, the then-Commodity Futures Trading Commission Chief, Gary Gensler, cited the film when appending new regulations for commodities markets.
“The Duke brothers intended to profit from trades in frozen concentrated orange juice futures contracts using an illicitly obtained and not yet public Department of Agriculture orange crop report,” Gensler told Congress.
“To protect our markets, we have recommended what we call the ‘Eddie Murphy‘ rule to ban insider trading using nonpublic information misappropriated from a government source.”
The Duke brothers’ scheme was clear. Betting on the future should be on an even playing field.
Now, the meteoric rise of prediction markets is forcing a messy rethink of what it actually means to have an inside edge.
“The historical excitement about prediction markets is that they’re going to elicit information,” Andrew Verstein, the co-director of the business law program at the University of California, Los Angeles, told DL News. “It can be that a person is a diligent researcher, or they’ve got their own satellite that looks at crops and makes predictions legally.”
“Or it can be that they have a friend at the Agriculture Department who tells them what’s going to happen with frozen orange juice concentrated futures. That’s not something that data is going to help us see the difference between.”
‘Most corrupt corner of Washington’
Prediction markets such as Kalshi and Polymarket exploded onto the scene in the run-up to the 2024 US Presidential election.
Since then, volumes on both platforms have nearly quintupled, reaching over $25 billion in volume in January, according to data collated by data dashboards on Dune.
There are wagers for everything. Some $30 million is riding on whether Jesus Christ will return by 2027. Bettors have placed another $11 million on the outcome of the Federal Reserve’s next meeting. The largest category in prediction markets is sporting events.
At the same time, digital sleuths are highlighting unusual, ultra-lucky traders in specific markets on these platforms.
Just hours before US special forces captured Venezuelan President Nicolás Maduro, a brand-new Polymarket account bet more than $30,000 on his ouster.
The account’s total payout exceeded $436,000, sparking major concern that they had intimate knowledge of the government’s classified military operation.
“The most corrupt corner of Washington, D.C. may well be the intersection of prediction markets and the federal government — where insider trading and self-dealing are no longer imagined risks but demonstrated dangers,” said New York Representative Ritchie Torres.
Torres and a host of Democrats have all co-sponsored the Public Integrity in Financial Prediction Markets Act of 2026. The bill prohibits elected officials from buying, selling or exchanging prediction market contracts tied to the administration’s policies.
Verstein shares a similar view.
“Government officials have a lot of power,” he said. “They have missiles and police. You don’t want them to be able to deploy that power in order to make their bets pay off.”
While that bill advances, another coalition of prediction market platforms, including Kalshi, Crypto.com, and Robinhood, argues that there is already a ban on precisely this kind of trading.
That’s because prediction markets are regulated by the CFTC, which has, thanks to the Murphy Rule, banned insider trading since 2010.
To date, however, there has been no major insider trading arrest in the US involving prediction markets.
Part of that, some academics argue, boils down to one question.
How is insider trading defined exactly, and when can anyone know when it has actually occurred?
Insider information
Trading on insider information involves using wit and expertise to try to predict an outcome.
Insider trading, however, is a legal term for describing fraud by which you use material nonpublic information — such as a secret USDA crop report — for profit.
Yesha Yadav, a professor of law and associate dean at Vanderbilt Law School, says the distinction between legally trading on insider information and illegal insider trading is becoming increasingly blurred.
“The challenge of prediction markets that we’re facing is that we don’t know when trading on insider information actually becomes insider trading,” Yadav told DL News. “The clarity of legal rules, duties, and understanding the scope of how broadly or narrowly the law reaches in this context is really unclear.”
It’s made even more unclear due to the breadth of markets available on prediction markets.
The Bad Bunny problem
Ahead of the Super Bowl in February, users bet roughly $113 million on what the Puerto Rican pop star Bad Bunny would play as the opening song for this year’s halftime show.
When asked if it would be considered insider trading if one of Bad Bunny’s dancers bet in this market, Kalshi CEO Tarek Mansour hesitated.
“If that’s the position that people are taking, which is essentially, ‘this is nonmaterial, nonpublic information,’” Mansour said, “and that it’s ok to talk about which song is going to be played, it’s ok to divulge certain information beforehand, then it’s totally fair game.”
In sum, it depends.
There’s also a case for insider trading on these markets — at least to an extent.
Polymarket CEO Shayne Coplan and Coinbase CEO Brian Armstrong suggest that insider trading should be encouraged because it can enhance the quality of the information markets provide.
A market with many insiders would, in theory, generate extremely accurate forecasts, they argue.
However, if average users are under the impression that most participants have key insights they don’t, they’re unlikely to be interested in participating.
“The way you make an exchange successful is that you reduce the amount of informed trading so that everyone feels like this is working for them,” Verstein said. “But if you do that, then it becomes less of a future machine. The people who know the future aren’t allowed to trade.”
It’s a delicate balance.
But it’s one that needs clearer attention from authorities, warns Yedev. Especially as these platforms swell in size and scope.
“People are seeing these future probability forecasts being brought into some really important settings,” she said.
“The fact that one doesn’t have clarity about the underlying governance is super problematic.”
Liam Kelly is DL News’ Berlin-based DeFi correspondent. Have a tip? Get in touch at [email protected].
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