Prediction markets have grown rapidly in popularity and are now attracting significant regulatory scrutiny. Recent developments have made clear that participation in these markets carries meaningful legal risk: a US Army soldier was indicted in April 2026 for allegedly trading on classified information, the Commodity Futures Trading Commission (CFTC) has reaffirmed its authority to police insider trading on these platforms, and the governors of New York and Maryland have issued executive orders barring state employees from using nonpublic information to profit on prediction markets. For public companies, the stakes are particularly acute. Employees and directors routinely possess material, nonpublic information (MNPI) about their companies that could inform trades on event contracts tied to stock prices, executive departures, earnings, M&A activity, and other corporate events. This alert surveys the current regulatory landscape and offers practical steps public companies should consider to address the risks prediction markets may pose.
What are prediction markets?
Prediction markets provide an online trading platform for “event contracts,” a type of swap typically in which payment depends on whether a specific future event transpires. Bilateral event contracts in which purchasers buy “yes” or “no” as to the occurrence of a particular event, are among the most popular. Some event contracts combine multiple yes/no contracts into a single one to offer multiple-choice options. Purchasers of event contracts may use them to hedge risk, to speculate on future events for profit, or as a kind of entertainment.
Operators of prediction markets in the United States typically register with the CFTC as a “designated contract market.” Designated contract markets are similar to futures exchanges and must comply with 23 separate CFTC regulations known as “Core Principles” to ensure transparency, promote good governance, guard against market manipulation, and maintain other customer protections. Designated contract markets are also self-regulatory organizations and as such must enforce their own rules to protect against manipulation, fraud, and unfair trading practices, including insider trading.
How do prediction markets work?
Topics covered on prediction markets are wide-ranging and include sports, weather, elections, the economy, geopolitics, technology, culture, finance, politics, and breaking news, among many others. Examples of recent event contracts available for purchase on one popular market included:
- Will a particular political figure be out of office by June 30 (yes or no)?
- Which team will win the professional basketball championship (among two choices)?
- How many times will the Fed cut rates in 2026 (among several choices)?
- Which will be the largest public company on June 30 (among several choices)?
- What will the high temperature in Hong Kong be today (among two choices)?
- Which companies will be acquired in 2026 (among several choices)?
- Which companies will go public in 2026 (among several choices)?
- What will the high price of crude oil be on June 30 (among two choices)?
- What will the stock price of a particular company be today (among several choices)?
A purchaser of an event contract under one of these examples would trade on either “yes” or “no,” and be paid out accordingly if the choice is correct. Event contracts usually have a fixed payout price, often $1, and a set expiration date. The price of the contract at the time of purchase reflects market expectation as to the outcome of a given event, such as 65 cents for “yes” and 35 cents for “no.” Designated contract markets make money from prediction markets primarily by charging transaction fees and spreads on binary event contracts. Event contracts on sporting events have drawn recent media attention as well as opposition from state and Native American gaming regulators and spawned a wave of enforcement actions against several prediction markets, with the CFTC often suing the same states asserting federal preemption of state gaming laws insofar as a designated contract market is involved.
What types of event contracts may be prohibited?
CFTC regulation 40.11 prohibits event contracts that reference terrorism, assassination, war, gaming, or an activity that is unlawful under any state or federal law, or that involves, relates to, or references an activity that is similar to any of those activities and that the CFTC determines by rule or regulation to be contrary to the public interest. Regulation 40.11 did not define any of the enumerated activities. Regulation 40.11 provides that the CFTC may initiate a 90-day review of event contracts and require delisting of event contracts that “involve, relate to, or reference” those enumerated activities. The CFTC considers individual event contract submissions on a case-by-case basis.
What rules prevent misconduct on prediction markets?
Designated contract markets are required to enforce their own trading rules on their platforms, and several have done so recently after allegations concerning insider trading or other alleged misconduct on the part of traders who purchased event contracts on the basis of MNPI. These prediction markets have assessed monetary penalties against traders, barred them from future trading, or referred them to other federal agencies for enforcement.
In light of these developments, the CFTC’s Division of Enforcement on February 25, 2026, issued an advisory reiterating the CFTC’s authority to police illegal trading practices occurring on prediction markets. The CFTC advisory noted four separate theories of potential liability:
- misappropriation of confidential information in breach of a pre-existing duty of trust and confidence to the source of the information (insider trading) pursuant to Section 6(c)(1) of the Commodity Exchange Act (CEA), and CFTC Regulations 180.1(a)(1) and (3);
- pre-arranged, noncompetitive trading and wash sales, under Sections 4c(a)(1) and (2)(A) of the CEA and Regulation 1.38(a);
- other prohibited trading practices including disruptive trading pursuant to Section 4c(a)(5) of the CEA; and
- fraud and manipulation under other various sections of the CEA.
On March 12, 2026, the CFTC Division of Market Oversight issued a prediction markets advisory, offering detailed guidance to designated contract markets on their regulatory duties when listing and overseeing event contracts, with an emphasis on sports-related offerings. The advisory emphasizes enhancing surveillance, mitigating manipulation risks, and ensuring proper self-certification to ensure market integrity.
Other federal regulations, including criminal statutes, may come into play. After a US Army soldier allegedly made almost $400,000 by purchasing event contracts on the basis of classified information surrounding a clandestine military operation, the Department of Justice indicted him on April 23, 2026. The indictment alleges unlawful use of confidential government information for personal gain, theft of nonpublic government information, commodities fraud, wire fraud, and making an unlawful monetary transaction. The CFTC also civilly charged the soldier with violating the CEA and CFTC regulations, including insider trading and misuse of government information.
Separately, New York Governor Kathy Hochul on April 22, 2026, issued an executive order entitled “Prohibiting State Employees from Profiting on Insider Information.” The order prohibits New York state employees from using “any nonpublic information obtained in the course of their official duties to seek profit or avoid loss from participation in a prediction market or similar service or assist any other person in seeking profit or avoiding loss from participation in a prediction market or similar service.” Similarly, Governor Wes Moore of Maryland issued an executive order on April 24, banning state employees from engaging “in financial transactions, including transactions made on prediction markets, using nonpublic government information obtained through their State employment or contractual relationship with the State, to benefit themselves financially or to further any private interest.”
What are upcoming regulatory developments in prediction markets?
On March 12, 2026, the CFTC released an advanced notice of proposed rulemaking (“ANPRM”) requesting comment on how prediction markets should be regulated, including the application of statutory core principles and existing CFTC rules to these markets. The ANPRM additionally asks for views on categories of event contracts that may be barred as against the public interest, with specific questions about sports- and game-related contracts. The ANPRM seeks feedback on the cost-benefit analysis of prediction markets. The ANPRM also solicited feedback on how exchanges can ensure listed event contracts are not vulnerable to manipulation. It is unclear when the CFTC may issue any proposed rules related to prediction markets.
What should public companies be doing with respect to prediction markets?
Review Insider Trading Policies. Consider typical language in public company insider trading policies that prohibit employees from “trading the company’s stock” or “engaging in transactions in the company’s securities” while in possession of MNPI gained in the course of employment. Some companies may conclude such language is sufficient to bar trading on prediction markets while in possession of MNPI, whereas others may prefer to amend the policy to specifically reference prediction markets. There are also questions as to whether window and blackout periods and pre-clearance requirements should apply to certain event contracts.
Update Corporate Codes of Ethics. Because prediction markets may not involve “securities,” some companies may take the view that an insider trading policy is not the best place to address any novel risks arising from the growing popularity of prediction markets. In that case, it may instead be appropriate to consider whether a corporate code of ethics should include a blanket statement of policy applicable to employees, akin to the New York and Maryland executive orders, prohibiting use of nonpublic information obtained in the course of employment in a prediction market.
Assess Crisis Communication Policies. While companies have long had to consider the impact of short selling and shareholder activism on stock price, prediction markets present new opportunities for market participants to take positions on negative company news. What is the company’s plan if an event contract predicting the CEO’s resignation gains traction? Missed earnings? A long-term stock drop? Such scenarios may require prompt action to rebut incorrect information circulating and settle the market, which may require adjustments to existing crisis management playbooks. Regulation FD and other SEC or stock exchange rules may impact any communication campaign as well.
Communication to Employees. While a company’s insider trading policy or code of ethics may already preclude use of company MNPI for personal gain, employees and directors may benefit from a written reminder of how such preclusion applies to event contracts and prediction markets.
