Is Insider Trading Illegal on Prediction Markets Like Polymarket and Kalshi?

Prediction markets like Polymarket and Kalshi let people trade contracts tied to real-world events: who wins an election, whether the Fed cuts rates, whether a bill passes. As these markets have grown, so has an obvious question — if someone has advance knowledge of how one of these events will turn out, is trading on it illegal the same way insider trading is illegal in the stock market?

The honest answer is: it depends on what, exactly, you mean by "illegal," and the framework that governs stocks doesn't map cleanly onto these markets at all.

What "Insider Trading" Actually Means, Legally

Classic insider trading law — most notably SEC Rule 10b-5 under the Securities Exchange Act — prohibits trading a security based on material, non-public information, in breach of a duty of trust or confidence owed to the source of that information. Every part of that definition matters. It's specifically about securities, specifically about a breach of duty, and it's the framework that governs corporate insiders trading their own company's stock, and — as we've covered separately — members of Congress trading on non-public information from their official role.

A political prediction market contract — a "yes/no" bet on whether a particular candidate wins, or whether a specific policy passes by a certain date — generally isn't structured or classified as a security in that sense. It's typically treated as an event contract or a type of derivative, which puts it in a different regulatory lane entirely. That distinction is exactly why the SEC's insider trading framework doesn't apply the same way here, even when the underlying behavior — trading on information other participants don't have — looks similar on the surface.

So Are Prediction Market Contracts Regulated at All?

Yes, just not under securities law. In the US, event contracts of this kind generally fall under the jurisdiction of the Commodity Futures Trading Commission (CFTC) rather than the SEC. Kalshi operates as a CFTC-regulated designated contract market (DCM), meaning it's a licensed exchange subject to CFTC oversight, including rules around market manipulation, fraud, and exchange self-policing obligations. That's a real regulatory regime — it's simply a different one than the securities-focused insider trading law that applies to stocks, and it doesn't use the term "insider trading" the way securities law does.

Platforms like Polymarket have historically operated with a different, and in some cases less direct, degree of US regulatory oversight — often structured to limit or restrict US-based users, or operating primarily outside the traditional exchange framework that governs a DCM. It's worth being explicit that this is a fast-moving area: regulatory treatment varies by platform, by contract type, and by jurisdiction, and it has been evolving quickly as regulators, exchanges, and courts work through where these products fit. Anything specific about a given platform's current legal status is worth verifying independently rather than assuming it's static.

A Gray Area, Not a Lawless Zone

None of this means trading on advance knowledge in a prediction market is consequence-free. A few things still apply, even where classic securities-style insider trading law doesn't reach:

CFTC anti-fraud and anti-manipulation rules still apply to regulated event contracts. A designated contract market like Kalshi operates under CFTC rules that prohibit fraud and manipulative trading practices, even though the specific "insider trading" statute built for securities doesn't govern these contracts directly.

Exchanges can, and do, write their own rules about who's allowed to trade specific contracts. A prediction market operator can restrict trading by people with a direct informational advantage over a specific contract's outcome — for example, someone directly involved in producing the event being bet on — as a matter of exchange rules and terms of service, separate from any government insider-trading statute.

Ordinary fraud and market manipulation law doesn't disappear just because securities law doesn't apply. Wash trading, coordinated manipulation schemes, and outright fraud can still trigger civil or criminal exposure under general fraud statutes or CFTC enforcement authority, independent of whether "insider trading" in the securities-law sense technically applies.

Reputational and platform-level risk is real even without a clean legal violation. A trader who's discovered to have used non-public information to place a large, well-timed bet on a prediction market may not have broken a specific insider-trading statute, but that doesn't mean there's no consequence — platforms can void trades, ban accounts, or face pressure to tighten their own rules in response, and public exposure can be its own cost.

The fair way to describe this space is a genuine regulatory gap, not a lawless one: the rules that exist are real, they're just less specific to the "insider trading" concept than what governs stocks, and they're still being worked out in real time as these markets grow and draw more regulatory attention.

Why This Question Keeps Coming Up

Part of what makes this confusing is that prediction markets increasingly overlap with the exact subject matter that securities and congressional disclosure law already covers — election outcomes, Federal Reserve decisions, legislative votes, regulatory rulings. A person with genuine early insight into, say, how a Fed decision will go, or whether a specific bill will pass a floor vote, could plausibly express that view in a prediction market contract, in an options position tied to an interest-rate-sensitive sector, or in a direct stock trade. Only one of those three would clearly trigger the securities-law insider trading framework discussed above, which is exactly the mismatch people are reacting to when they ask whether prediction market trading is "insider trading."

It's also worth being precise about who could plausibly have that kind of edge. Someone directly involved in producing an outcome — a campaign staffer with internal polling, a congressional staffer aware of unreleased vote-count whip lists, or a government employee with early access to an economic data release — sits in a meaningfully different position than an ordinary trader who's simply done more research than most participants. Good research and analysis producing a trading edge is exactly what these markets are designed to reward; it's advance access to non-public information, obtained through a position of trust, that raises the harder legal and ethical question. The problem is that outside of the CFTC's general anti-fraud authority and each platform's own rules, there's no dedicated statute spelling out exactly where that line sits for event contracts the way Rule 10b-5 does for securities.

The Contrast With How Mature Securities Disclosure Actually Is

What makes the prediction market gray area stand out is how much more developed the disclosure regime is on the securities side. A corporate officer or director trading their own company's stock has to file a Form 4 within two business days of the transaction — tracked on MySmarTrend's insider tracker. A member of Congress trading individual stocks has to file a Periodic Transaction Report within 45 days — tracked on our congressional trading tracker, and explained in detail in our STOCK Act breakdown. Both regimes took decades of legislative and regulatory work to define who counts as an insider, what counts as a security, and what has to be disclosed and when.

Prediction markets haven't had that runway. There's no settled definition of who counts as an "insider" on a bet about an election outcome, no mandatory disclosure regime comparable to a Form 4 or a PTR, and no single regulator with clear, comprehensive authority over every version of these products, since jurisdiction can depend on how a specific contract and platform are structured. Until that catches up — and it may, as these markets keep growing and drawing regulatory attention — the practical guidance for anyone trading on them is straightforward: assume you have less legal protection and less transparency into other participants' information than you would in a regulated stock trade, and size your risk accordingly.

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