Prediction Markets, Insider Trading, and the Return of First Principles
On February 25, 2026, the CFTC’s Division of Enforcement issued an advisory that deserves careful attention from anyone building, trading, or investing in prediction markets. Release No. 9185-26 followed two public enforcement matters involving misuse of nonpublic information and fraud in event contracts traded on KalshiEX, a Designated Contract Market.
If you have been reading my recent work on digital assets, enforcement trends, and the migration of traditional securities concepts into new market structures, none of this should surprise you. The wrapper changes. The guardrails do not.
Prediction markets are not a regulatory void. They are regulated derivatives venues. And the CFTC is making clear that the anti-fraud architecture of the Commodity Exchange Act travels with them.
Let’s unpack what just happened and why it matters.
The Facts the Market Should Not Ignore
The advisory highlights two fact patterns.
First, in May 2025, social media videos appeared to show a political candidate trading contracts tied to his own candidacy. Kalshi’s compliance team contacted the candidate the same day. The trader acknowledged the impropriety. Kalshi imposed disgorgement of profits, a monetary penalty, and a five-year suspension from access to the exchange.
The CFTC noted that, based on the fact pattern, the conduct potentially violated Section 6(c)(1) of the Commodity Exchange Act and Regulation 180.1(a)(1) and (3), which prohibit manipulative or deceptive schemes and fraudulent conduct.
Second, in August and September 2025, an individual traded a prediction market related to a YouTube channel while serving as an editor for that channel. The exchange determined that the trader likely had advance knowledge of video content prior to public release and traded successfully on that information. Kalshi imposed disgorgement, a substantial penalty, and a two-year suspension.
Again, the CFTC framed the conduct under Section 6(c)(1) and Regulation 180.1, specifically referencing misappropriation of confidential information in breach of a duty of trust and confidence. In other words, insider trading.
The Commission also reminded the market that it retains full authority to police illegal trading practices on any DCM, including insider trading, wash sales, pre-arranged trading, disruptive trading, fraud, and manipulation. It cited recent federal cases and administrative orders to reinforce that this is not theoretical authority.
The message is simple: if it would be illegal in a futures market, it is illegal in a prediction market.
Prediction Markets Are Derivatives Markets
There has been a persistent narrative that event contracts exist in a regulatory gray zone. They do not.
A Designated Contract Market is subject to Section 5(d) of the Act and its Core Principles. That includes obligations to maintain audit trails, conduct surveillance, and enforce rules against prohibited practices. Exchanges have independent duties. The Commission has supervisory and enforcement authority.
In other words, prediction markets are not social platforms with price feeds. They are regulated marketplaces operating under a statutory regime that has governed derivatives for decades.
From an enforcement perspective, the relevant provisions are familiar:
Section 6(c)(1) of the CEA, which prohibits the use of any manipulative or deceptive device in connection with a contract of sale of any commodity in interstate commerce.
Regulation 180.1, the CFTC’s Rule 10b-5 analog, modeled on SEC Rule 10b-5, which captures fraud, misrepresentations, and deceptive conduct.
Section 4c(a) and related regulations governing wash trades and noncompetitive trading.
Section 4c(a)(5) addressing disruptive trading practices.
If you have followed the SEC’s evolution in digital asset enforcement, this framework should feel familiar. Different statute. Same philosophy.
Insider Trading Without “Securities”
One of the most interesting aspects of the advisory is conceptual.
We are accustomed to discussing insider trading in the securities context, grounded in Section 10(b) of the Exchange Act and Rule 10b-5. But the CFTC has long had parallel authority under Section 6(c)(1) and Regulation 180.1 to pursue fraud and misappropriation in commodities and derivatives markets.
The YouTube editor case illustrates how traditional misappropriation theory translates cleanly into prediction markets:
The trader had a pre-existing duty of trust and confidence to the content creator.
The trader possessed material nonpublic information.
The trader used that information for personal gain.
The conduct operated as a fraud on other market participants.
No securities. No issuer. No earnings call. Just a contract tied to a future event.
The theory remains intact because the animating principle is not the label of the instrument. It is the integrity of the market.
I have written previously about how enforcement agencies borrow doctrine across asset classes. We saw this in crypto markets, where insider trading theories developed in equities were deployed against digital asset traders long before Congress acted. The same migration is happening here.
Prediction markets are now formally within that doctrinal current.
Direct Influence and Market Integrity
The political candidate example raises a separate but related concern: trading in a contract over which one has direct or indirect influence.
Kalshi’s rules prohibit such trading. The exchange acted swiftly. The CFTC emphasized that this type of conduct can implicate anti-fraud provisions.
This is less about classical insider trading and more about structural manipulation. If you can influence the underlying event, trading on that event contract threatens the very premise of price discovery.
We see echoes of this concept in other markets:
Corporate insiders trading around corporate events.
Benchmark manipulation in rates or commodities.
Market participants engaging in conduct designed to affect settlement prices.
Prediction markets compress these dynamics into highly visible, retail-facing venues. That visibility will not soften the enforcement posture. If anything, it increases the stakes.
The Compliance Burden on DCMs
The advisory also serves as a reminder that DCMs have affirmative obligations under the Core Principles of the Act.
Maintaining audit trails. Conducting surveillance. Enforcing exchange rules. Referring appropriate matters to the Commission.
Kalshi’s internal enforcement program handled these matters. That is notable. Exchanges are not passive platforms. They are frontline regulators.
But the CFTC was explicit: the Commission retains full authority to investigate and prosecute violations occurring on any DCM. Coordination does not dilute jurisdiction.
For operators of event markets, this means your compliance program cannot be ornamental. It must be designed to detect:
Trading by individuals with direct influence over outcomes.
Patterns suggestive of access to nonpublic information.
Wash trading and noncompetitive trades.
Disruptive practices designed to distort market signals.
The cost of underinvestment in surveillance is not theoretical. It is statutory.
A Broader Enforcement Trend
Zoom out.
Over the past several years, we have seen regulators assert that if a market functions like a traditional financial market, it will be regulated like one. Crypto exchanges. Token platforms. Now prediction markets.
The pattern is consistent:
Novel structure.
Early experimentation.
High-profile misconduct.
Enforcement framed in existing statutory language.
A public advisory to reset expectations.
This advisory is that reset moment for prediction markets.
If you are building products around event contracts, you should assume that anti-fraud, anti-manipulation, and insider trading doctrines apply with full force. If you are trading on these platforms, you should assume your activity is surveilled and that misappropriation theories are not limited to Wall Street.
Guardrails Aren’t Roadblocks
I often describe the law as a set of guardrails rather than a wall. Markets flourish when participants understand the boundaries.
Prediction markets offer powerful price discovery tools. They can aggregate information efficiently and provide insight into political, cultural, and commercial events. But their credibility rests on the perception that prices are not the product of hidden information or self-dealing.
The CFTC’s advisory does not stifle innovation. It clarifies the perimeter.
And for those who build and operate in this space, clarity is a gift. It allows you to design compliance systems, trading policies, and internal controls that anticipate enforcement rather than react to it.
The lesson is not that prediction markets are suspect. The lesson is that they are real markets.
And real markets are governed by first principles.
