Prediction Markets Pose Insider Trading, Company Reputation Risk

Glance at company bets trending on Kalshi or Polymarket, and you’ll find exactly what you’d imagine for platforms popular among young, techy users: the odds of Elon Musk leaving Tesla this year, SpaceX’s closing market cap the day it goes public, and GameStop’s chances of successfully taking over eBay.

Keep scrolling, and wager topics get more specific: fast casual dining chain Cava’s restaurant count, FedEx’s average daily package volume, and Under Armour’s chances of beating earnings estimates—information tucked inside soon-to-be-public quarterly reports.

As the subjects of online bets, companies face questions about insider trading, reputational and legal risk, and whether internal policies address this new environment. A few S&P 500 names—among them GoDaddy Inc. and US Bancorp—disclosed internal policies this year that ban insider trading on prediction markets, according to Bloomberg Terminal data.

Many more are still trying to figure out how to interact with an online industry that has seen its monthly transaction volume skyrocket from $1.2 billion to over $20 billion in the past year.

Kalshi and Polymarket recently announced new measures intended to curb insider trading, and even if employees don’t know it, public companies’ existing policies are often broad enough to prohibit profiting off confidential information, said Lillian Tsu, partner at Cleary Gottlieb Steen & Hamilton LLP. Some corporations are waiting for more regulatory certainty before drilling down on the nascent industry.

Risk remains either way.

“From a company perspective, we are worried about reputational harm,” Tsu said. “We’re worried about safeguarding our confidential information.”

Rumors, Reputations, Regulators

Company and financial markets account for $800 million, or about 1%, of Kalshi’s total trading volume, according to internal platform data shared with Bloomberg Law. The site’s leader board also shows smaller winnings on company trades than for politics or sports.

Right now, companies’ prediction market risks largely center on the rumors bets could spur.

Kalshi’s CEO predictions page, for example, includes wagers on the possible departures of Apple Inc.’s Tim Cook, OpenAI’s Sam Altman, and Musk. Similar bets are searchable on Polymarket. Company insiders leaking nonpublic information through a CEO succession bet, Tsu said, is a prime example of scoops that could impact stock prices.

Scott Kimpel, partner at Hunton Andrews Kurth LLP, said risk is tied to the simple fact that illegal insider trading shines negative light on companies, no matter the platform.

OpenAI reportedly fired an employee this year for using internal confidential information on the platforms. But so far, a verified case of large-cap public company insider trading on prediction markets hasn’t been reported. Some of the biggest scandals are confined to politics.

Prediction markets regulation is still unfolding, but enforcement risks are no less present. Wagers are usually considered event contracts—a type of derivative that depends on the outcome of a specific event. They’re not generally classified as securities like stocks and bonds, which fall squarely under the Securities and Exchange Commission’s jurisdiction.

Instead, the Commodity Futures Trading Commission, which has anti-fraud and anti-insider trading provisions akin to the SEC’s, has claimed it has exclusive jurisdiction. Federal prosecutors at the Justice Department could also bring criminal wire fraud charges related to suspicious prediction market activity, Kimpel said.

Kalshi, Polymarket Weigh In

The biggest prediction markets say they are heeding insider trading concerns. Kalshi announced plans March 23 to ban athletes and politicians from certain trades, and Polymarket the same day updated its rules to prohibit trading on stolen confidential information, illegal tips, and more.

Kalshi has about 200 internal insider trading investigations pending, and the several that are public aren’t company-focused, said Jack Such, who works on business and media development for Kalshi. Corporate insider trading is “exceedingly rare if it happens at all,” he said.

The platform touts its onshore status as proof of compliance. Kalshi collects information required by the CFTC, including “know your customer” data, and markets involve a list of prohibited traders, Such said. A wager on quarterly Tesla production numbers, for instance, bans those “who hold any material, non-public information.”

Kalshi’s systems function similarly to those of stock markets, with software to pick up on suspicious trade sizes and more, he said.

“You can very easily flag statistically when someone is winning way more often than they theoretically should,” Such said.

Polymarket—which technically banned Americans from trading on its international, decentralized platform and is rolling out a US-specific operation regulated by the CFTC, did not return a request for comment. It said publicly in April that insider trading has “no place” on the platform.

To Update or Not to Update?

The sprinkle of prediction market policy updates among the S&P 500 fall within insider trading policies or codes of conduct. The former usually pertains to regulated securities, while the latter often broadly directs employees not to use confidential information for personal gain.

“You can find provisions in a lot of policies that you could kind of squint and read to cover prediction markets,” said Matthew Gehl, partner at Covington & Burling LLP.

But being more explicit isn’t a bad idea, he said.

Internet domain registry GoDaddy clarified in an April 24 proxy statement that its insider trading policy covers prediction markets.

“Given the increased popularity and visibility of these platforms and the fact that participation is not governed by existing insider trading laws, we felt it was prudent to establish this policy for the company and its employees,” a GoDaddy spokesperson said over email.

Data storage company Seagate Technology Holdings named Polymarket and Kalshi in a May 1 code of conduct update banning employees from “speculative activities where Seagate is the subject.” And construction and engineering firm Emcor Group Inc. amended its insider trading policy April 2 to ban prediction market trades involving nonpublic information.

These companies are the exception. Kimpel predicts most will need a catalyst to act.

“Unless there’s some serious enforcement case, you may not see a lot of change,” he said.