You can bet on anything now. Whether the Federal Reserve cuts interest rates next month, who wins the next major election, or if a tech giant pushes its software update on time. Prediction markets have exploded from niche internet corners into massive financial arenas. Kalshi is chasing a staggering $40 billion valuation. Polymarket handles billions in volume.
But this rapid growth has triggered a massive panic inside the compliance departments of the world's biggest financial institutions. Also making waves in related news: Goldman Sachs Moves to Block the Ultimate Information Arbitrage.
Traders and corporate insiders possess information that the public does not. When they use that information to buy stocks, it is classic insider trading. But what happens when they use that same non-public information to buy an event contract on a prediction market?
Wall Street is realizing that its current defense systems have a massive blind spot. Additional insights regarding the matter are covered by The Economist.
The New Trading Loophole Wall Street Didn't See Coming
For decades, compliance departments focused on traditional securities. They watched stock trades, options volume, and bond positions. They forced employees to disclose personal brokerage accounts to ensure nobody traded ahead of a major merger or earnings report.
Prediction markets completely flipped the script. These platforms use binary options. You buy a contract that pays out $1 if an event happens and $0 if it does not. The price of the contract reflects the market's perceived probability of the outcome.
It looks like gambling. It feels like gambling. But legally and operationally, it functions as a highly liquid financial market.
Insiders quickly realized that these platforms offered a backdoor to profit from secret corporate and government data. If you know a regulatory approval is going to fail tomorrow, you do not have to short the company's stock. You can just buy thousands of contracts stating the regulator will reject the application.
The temptation is obvious. The regulatory scrutiny is even more intense. The Commodity Futures Trading Commission (CFTC) made it clear that insider trading prohibitions apply to these platforms. They do not care if the instrument is called a swap, an event contract, or a bet. If you use material non-public information to gain an unfair edge, you are breaking the law.
We are already seeing the first wave of enforcement. Federal authorities recently pursued parallel criminal and civil actions against an individual accused of using confidential government information to trade event contracts on Polymarket.
The wild stories do not stop there. Take the recent Nobel Peace Prize scandal. Organizers had to launch an investigation after a sudden flurry of successful bets flooded a prediction market right before the Venezuelan political leader won the award. Someone clearly knew the result early.
In another bizarre case, a US special forces soldier allegedly used advanced knowledge of a military operation to capture Venezuelan leader Nicolás Maduro to place bets on Polymarket.
Even more alarming for global security, researchers identified 12 suspicious accounts that placed massive, perfectly timed bets days before a US attack on Iran. Those accounts walked away with hundreds of thousands of dollars in profit. They did not trade oil futures or defense stocks. They traded the event itself.
Why Traditional Insider Trading Rules Fail on Event Contracts
Most corporate insider trading policies are built around the Securities Exchange Act of 1934. They are designed to protect shareholders from executives who buy or sell company stock based on secret information.
Event contracts do not always fit neatly into that box.
If an employee at a private logistics firm knows that a massive shipping port is about to shut down due to a labor strike, they cannot easily profit on the stock market. The logistics firm is private. But if a prediction market lists a contract on whether the port will close by Friday, that employee can make a fortune in minutes.
Traditional policies fail here for three distinct reasons.
First, the underlying asset is often not a security. It might be a macroeconomic data point, a geopolitical event, or a climate outcome. Employees do not think they are violating company rules because they are not trading corporate stock.
Second, prediction markets allow granular betting. You can bet on the exact week a product launches or the precise percentage of an interest rate hike. Traditional options markets are rarely that specific.
Third, anonymity is much easier to maintain on decentralized platforms. While US-regulated exchanges like Kalshi require strict identity verification, overseas or crypto-based platforms allow users to trade through anonymous digital wallets.
This creates a terrifying reality for corporate boards. An insider's trade can act as a silent leak. If a tech company's chief engineer secretly buys contracts betting that a product launch will be delayed, the sudden shift in contract prices signals to the entire world that something is wrong behind closed doors.
Insiders might even face the temptation to manipulate real-world events. Imagine a manager who bets heavily that a project will not meet its deadline, then intentionally slows down production to secure a massive payout on a prediction market. It sounds like a movie plot. Compliance officers know it is a real vulnerability.
How Goldman Sachs and the Big Banks Are Slapping Down Restrictions
Wall Street is not waiting for the regulators to clear up the confusion. The major banks are moving quickly to shut this down before it blows up their business.
Goldman Sachs just issued a sweeping internal memo to its workforce. The investment banking giant updated its personal trading policy to strictly prohibit employees from trading prediction market contracts linked to financial markets, corporate events, macroeconomic data, geopolitics, and political elections.
Goldman is drawing a hard line. If you work there, you cannot bet on whether the Fed cuts rates. You cannot bet on election outcomes. You cannot bet on GDP numbers.
The bank left a tiny window open. Staff can still place wagers on sports and entertainment categories. You can bet on the Super Bowl or the Oscars. But anything that touches the financial system or global politics is completely off-limits.
The penalties at Goldman are severe. A single violation triggers a warning and potential forfeiture of profits. If an employee breaks the rules more than once, they face immediate termination. The bank even stated it reserves the right to claw back any trading gains exceeding $200 or force the employee to donate those funds to charity.
When questioned about the policy shift, Goldman management kept it brief. They noted that trading on material non-public information is strictly prohibited across every single market the bank operates in.
Goldman is not alone in this fight. The rest of Wall Street is falling in line.
- JPMorgan Chase explicitly extended its code of conduct to cover prediction markets, banning employees from using any confidential or non-public information to place event bets.
- Bank of America implemented strict restrictions preventing staff from trading event contracts tied to company-specific milestones, macroeconomic data releases, and financial services events.
- Morgan Stanley quietly updated its employee code of conduct to incorporate specific rules governing prediction market activity, aligning its defense with the rest of the major investment banks.
These institutions understand the massive reputational risk. If a mid-level analyst at a major bank uses a leaked economic report to make $50,000 on a prediction market, the bank faces a public relations nightmare and an intense regulatory colonoscopy.
The Real Compliance Nightmare for Every Corporate Board
Do not assume this is just a problem for Wall Street banks. This impacts every single company, including public corporations, private startups, universities, and non-profit organizations.
If your company is developing a new medical drug, your scientists know the clinical trial results before the public does. If your company is bidding on a massive government defense contract, your procurement team knows whether you won or lost days before the official press release.
Under old compliance models, those employees knew they could not buy company stock. But they might assume that placing a quick bet on an online prediction platform is harmless fun.
It is not harmless. It exposes the entire organization to secondary liability. Regulatory agencies like the SEC and the CFTC look closely at whether companies maintain adequate internal controls to prevent the misuse of confidential information. If your employee uses company data to trade on a prediction market and you do not have a policy forbidding it, your organization could face severe penalties for failing to supervise its staff.
The legal framework is shifting fast. Federal prosecutors are using wire fraud statutes to target prediction market misconduct. Wire fraud does not care whether an event contract meets the strict legal definition of a security or a commodity. It only requires proof that someone used a electronic communication system to execute a scheme to defraud based on stolen, confidential information.
Action Plan for Compliance Leaders
You cannot afford to ignore this trend. If you run a company or manage a compliance team, you need to update your internal guardrails immediately.
Start by expanding your insider trading policy. Do not just list stocks, bonds, and derivatives. Explicitly add event contracts and prediction markets to the list of restricted instruments. State clearly that using any company-related information to trade on these platforms is a direct violation of corporate policy, regardless of how the platform categorizes the transaction.
Next, update your corporate code of conduct. Insider trading policies often apply only to executive officers and specific designated insiders who have routine access to financial data. Prediction markets create risks across your whole employee base. A factory manager might know about a supply chain disruption before anyone else. A customer support lead might notice a massive data breach before the executives do. By putting the restriction in the general code of conduct, you bind every single employee to the same standard of confidentiality.
Use real, concrete examples during employee training. Do not just read dry legal text. Tell your team directly: "If you learn that our upcoming product launch is delayed, you cannot go onto a platform like Kalshi or Polymarket and bet on that delay." Employees need to understand that the platform they use does not protect them from the legal consequences of using inside information.
Finally, establish clear reporting and enforcement mechanisms. Give your employees an anonymous channel to report suspicious trading activity. Decide in advance how you will handle violations. Will you implement a zero-tolerance policy like the major Wall Street banks, or will you use a tiered warning system?
The markets are evolving faster than the law. Waiting for a court to hand down a definitive ruling is a recipe for disaster. The platforms are scaling up, the liquidity is pouring in, and the regulators are hunting for examples. Protect your organization by locking down your policies before an employee's bad bet costs you your reputation.
