In brief
The Commodity Futures Trading Commission’s Division of Enforcement has released a Prediction Markets Advisory (“Advisory”) highlighting that the agency will likely be increasing its enforcement scrutiny of prediction markets and their participants. While prediction markets platforms such as Kalshi and Polymarket, which are regulated by the CFTC as Designated Contract Markets (DCM), maintain internal compliance and investigation programs, the Advisory emphasizes the CFTC’s view that it retains primary enforcement jurisdiction with respect to most prediction markets and contracts under the Commodity Exchange Act (CEA) and stands ready to bring actions where it identifies violations that it believes warrant federal action. Our initial impression is that the CFTC is unlikely to expend a great deal of independent enforcement resources for smaller or more retail trading, which are likely to remain situations where the DCMs investigate and report the misconduct to the CFTC, which in turn may bring a follow-on enforcement action based on those facts. For example, Kalshi has recently reported to the authorities its first suspected insider trading incidents. On the other hand, we would expect the CFTC (perhaps working in conjunction with the DCMs) to take more of a lead in situations where the conduct involves large, widespread or coordinated trading, sophisticated market participants and/or sophisticated alleged manipulative or fraudulent conduct.
What market participants should do now
Given heightened regulatory attention, firms should consider:
- Reviewing internal policies on non-public information, communication controls, and employee trading
- Evaluating prediction market activity under existing insider trading, manipulation, and market abuse frameworks
- Creating contemporaneous memorialization for the reasons why a trading position was taken, including citations to public and private research conducted
- Training personnel on the regulatory status of prediction markets and potential enforcement exposure
- Monitoring future CFTC and SEC guidance as these markets continue to evolve
CFTC identifies key enforcement risk areas
The Advisory reiterates that the CFTC may pursue enforcement for any illegal trading activity occurring on a DCM, including:
- Insider trading
Misappropriation of confidential or nonpublic information in breach of a duty of trust or confidence
Relevant authority: CEA §6(c)(1); CFTC Reg. 180.1
- Pre-arranged or non-competitive trades; wash sales
Prohibited trade structuring designed to negate market risk or create false volume
Relevant authority: CEA §4c(a)(1), (2)(A); CFTC Reg. 1.38
- Disruptive trading practices
Conduct that disrupts fair and orderly markets, including spoofing
Relevant authority: CEA §4c(a)(5)
- Fraud and manipulation
Traditional CEA anti fraud and anti manipulation provisions continue to apply in full
Coordinated regulatory interest
The CFTC’s announcement aligns with broader federal scrutiny:
- SDNY US Attorney Jay Clayton recently stated that his office is monitoring potential insider trading and manipulation in prediction markets.
- A joint CFTC–SEC statement confirmed that the SEC may retain jurisdiction, including enforcement authority, over prediction market contracts involving public companies or securities related outcomes.
In addition, guardrails over youth access and substantive limits on certain predictive markets (e.g., predictive markets related to whether a certain political figure will die by a certain date) could be forthcoming as they are heavily debated in Congress. Finally, we note that more than a dozen states are challenging the CFTC’s authority to regulate prediction markets, claiming that prediction markets are essentially gambling subject to primary state regulation. Many expect that the issue will take years to settle, and will potentially reach the Supreme Court.
Rapid market growth increases compliance risk
Prediction markets have expanded significantly in both participation and trading volume. Examples include:
- A Kalshi market on whether Iran’s Supreme Leader will be out of office by September 1, 2026 recently exceeded USD 28 million in trading volume
- Who will be the Democratic Party’s candidate for President in 2028 is approximately USD 55 million in trading volume
- A Federal Reserve Chair nomination market reportedly reached approximately USD 500 million in trading volume earlier this month
As these markets grow, there is increasing interest from funds and proprietary trading firms in these markets in order to hedge and effectively manage risk. Despite this growth, many newer market participants mistakenly believe these markets operate with minimal regulation. However, the CFTC’s Advisory directly contradicts that perception.
Client training and advisory support
We have detected increased interest concerning the legal and compliance issues surrounding prediction markets. If you are interested in learning more, we are available to provide:
- CLE programs on prediction market regulation and enforcement risk
- Compliance assessments tailored to firms trading in or analyzing prediction markets
- Guidance on emerging enforcement trends and risk mitigation strategies
- Assistance with regulatory response or internal investigations into potentially improper market practices
Please contact any above-listed Eye on Enforcement authors or contributors with any questions about this note or for assistance assessing your firm’s exposure.