Prediction Market Insider Trading: The Law, the Rules and the Cases

The short version

• Yes. Trading an event contract on material nonpublic information can break the law, but the law was written for commodities and the hard edges are still untested.
• An event contract pays a fixed amount on whether a stated event happens, such as an election or a sporting outcome, usually as a “Yes” or “No” question.
• The main federal hook is CFTC Rule 180.1, under section 6(c)(1) of the Commodity Exchange Act. It needs fraud or a breach of a duty, not merely a better read of the odds.
• A separate provision, the “Eddie Murphy rule” in the Act’s section 4c(a)(3) to (4), reaches anyone trading on misappropriated nonpublic government information. The CFTC first used it in April 2026.
• CFTC-registered exchanges go further in their own rulebooks. ForecastEx and Polymarket US bar anyone who can influence an outcome, whether or not they hold inside information.
• The penalties are real. On a platform, an insider trade can draw a fine of up to $500,000 for each violation and a ban, and the same conduct can be charged as a federal crime.
• Enforcement is early, as of 30 October 2026: two CFTC civil suits, two platform disciplinary actions, a criminal case and more than a dozen bills in Congress.^{1,2,3,4,5,6,7,8}

This piece sits under our guide to prediction market disputes, and whether these markets are lawful at all is in the lawsuits.¹

Is insider trading illegal on prediction markets?

Yes in some cases, but far from all. Federal anti-fraud law can reach it, yet unlike the stock market there is no blanket ban on trading while you hold material nonpublic information (MNPI, meaning price-moving information that has not been made public).¹

Insider-trading law grew up in securities markets. Trading on MNPI in breach of a duty violates the Securities and Exchange Commission’s (SEC) Rule 10b-5, either under the classical theory, where a company’s insiders owe a duty to their shareholders, or the misappropriation theory, where an outsider trades on information taken in breach of a duty to its source. The Supreme Court has rejected the idea that the rule bars all trading on an information advantage.¹

Derivatives law was narrower. Section 753 of the 2010 Dodd-Frank Act amended the Commodity Exchange Act (CEA, the federal law the CFTC administers), and in 2011 the CFTC adopted Rule 180.1, “modeled on” Rule 10b-5. The CFTC has said Rule 180.1 is likewise not a parity-of-information rule: “derivatives markets have long operated in a way that allows for market participants to trade on the basis of lawfully obtained” MNPI.¹

There is a threshold catch. Rule 180.1 reaches an event contract only if the contract is a “swap” under the CEA, which the Act defines to include a contract whose payment is “dependent on the occurrence, nonoccurrence, or the extent of the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence.” At the preliminary-injunction stage federal district courts split evenly on whether sports event contracts are swaps. Those rulings went up on appeal, and whether these contracts are swaps at all is now the fight in the prediction-market lawsuits.¹

What counts as insider trading on an event contract?

It is trading on information that is material and nonpublic, where using it breaks a duty of trust and confidence. Simply reading the odds better than other traders is not enough.¹

Rule 180.1(a) makes it unlawful, intentionally or recklessly, in connection with any swap, to “use or employ … any manipulative device, scheme, or artifice to defraud,” or to “engage … in any act, practice, or course of business, which operates or would operate as a fraud or deceit upon any person.” The rule sits under CEA section 6(c)(1), which bars any “manipulative or deceptive device or contrivance” in connection with a swap. Breach of a duty is the pivot, and the misappropriation theory is the live route.^1,4,8,9

A separate, broader provision covers government information. CEA section 4c(a)(3) bars a federal employee or agent who, by virtue of the job, acquires price-moving information not yet made generally available, from using it to trade a swap. Section 4c(a)(4)(C) bars any person from using information they “steal, convert, or misappropriate” from a federal source to trade a swap. This is the “Eddie Murphy rule,” the CFTC’s own name for it.^3,4,10

Title 18 fraud statutes are an alternative where the derivatives rules do not reach: mail fraud (18 U.S.C. 1341), wire fraud (18 U.S.C. 1343) and securities and commodities fraud (18 U.S.C. 1348). Two Second Circuit decisions narrow them. United States v. Blaszczak held that confidential information about what a federal agency will decide, and when, is not federal “property” under the wire-fraud and 1348 statutes. United States v. Chastain held that a misappropriation case built on a private company’s confidential information must prove the information had commercial value to that company. Whether either limit reaches Rule 10b-5 or Rule 180.1 is unsettled.¹

For an employer the exposure is concrete. An employee who trades an event contract on the company’s own material nonpublic information can breach the duty of trust and confidence that the misappropriation theory turns on. A written policy on whether staff may trade event contracts is the plainest guard.¹

Who regulates insider trading on prediction markets, and what do the venues’ own rules add?

Three bodies, each with a different tool. The CFTC brings civil cases under Rule 180.1 and the Eddie Murphy rule; the exchange polices its own rulebook through a disciplinary process; and the Department of Justice brings criminal charges. The registered prediction markets so far operate under the CFTC as designated contract markets (a DCM is a type of derivatives exchange), each filing a rulebook with the CFTC.^1,2,4

The rulebooks are the broadest layer because they do not require a breach of duty. Kalshi, through the rulebook quoted by the Congressional Research Service, bars an “Insider that has access to [MNPI]” on the subject of a contract, anyone with “the ability to exert any influence” on it, and any “decision maker … no matter the scale and importance of the influence” on the outcome.¹

ForecastEx, a CFTC-registered DCM whose controlling member is part of the Interactive Brokers group, does the same at Rule 509(h). It bars an Insider with access to MNPI or anyone who “has the ability to exert any influence” over the event, and it bars an employee of a Source Agency (the body that publishes the data a market settles on) “regardless of whether the Market Participant possesses material non-public information.”⁶

Polymarket US bars the same conduct at Rule 7.2 of its 30 September 2026 rulebook. Rule 7.2(g) bars trading “on the basis of confidential information” about an outcome where doing so “would constitute a breach of a pre-existing duty of trust and confidence”; 7.2(h) bars trading on such information passed on by someone who owed that duty; and 7.2(i) bars anyone holding “a position of authority or influence sufficient to affect the outcome.”⁷

How a dispute between a trader and a platform is arbitrated is in prediction-market arbitration, NFA arbitration, financial-markets arbitration and FINRA arbitration.¹

What have regulators and courts done so far?

Not much yet, and the contested cases are unresolved. On 25 February 2026 the CFTC issued an advisory, carried in the Congressional Research Service’s account, that discussed two Kalshi disciplinary actions: a political candidate who traded contracts on his own candidacy, and an employee of a company affiliated with a YouTube channel who traded contracts tied to the channel’s videos. Kalshi fined and suspended both, which are completed platform actions. The CFTC had not charged either but said both “potentially” violated Rule 180.1, and that exchanges have “an independent duty … to maintain audit trails, conduct surveillance, and enforce rules” themselves.¹

On 23 April 2026 the CFTC filed a civil complaint in the Southern District of New York, CFTC v. Van Dyke, No. 1:26-cv-03369. It alleges that a US Army service member, who helped plan the operation to capture former Venezuelan President Nicolás Maduro, traded “Maduro Out” contracts using classified information on Polymarket.com, the decentralized Polygon-based trading protocol in the complaint, not the CFTC-registered Polymarket US whose rulebook is quoted above. According to the complaint, he bought more than 436,000 “Yes” shares for about $32,538 and realised more than $404,000 in profit after the capture on 3 January 2026. The CFTC calls it its first insider-trading charge involving event contracts and its first use of the Eddie Murphy rule. These are allegations, and the case is unresolved.^3,4

The Department of Justice announced the same day an unsealed indictment charging the same defendant with commodities fraud, wire fraud and related offences. That is a separate criminal case, also unproven. The Congressional Research Service lists a second CFTC civil action, CFTC v. Spagnuolo, No. 26-cv-04419 (S.D.N.Y. 2026), again an allegation, and the US Attorney for the Southern District of New York has said prosecutors are reviewing which laws could support criminal charges on these markets.^1,2,5

Congress is watching the platforms directly. On 29 September 2026 the House Committee on Oversight and Government Reform said it was continuing an investigation opened in May 2026, had sent letters to three operators about their identity checks and surveillance, and had received nearly 1,000 documents and five briefings from Polymarket and Kalshi. The wider litigation is in the prediction-market lawsuits.¹²

How does a platform handle a case?

On a CFTC-registered exchange a suspected insider trade runs through a written disciplinary process that ends in a named panel’s reasoned decision, with a right of appeal and public notice. Polymarket US sets this out in Chapter 8 of its rulebook.⁷

• Surveillance and investigation: the exchange monitors trading and the Compliance Department may open an inquiry (Rules 8.2 and 8.3).
• Notice of charges: a respondent is served a notice stating the conduct alleged, the specific Rule said to be broken and the proposed sanctions, with a right to answer, a hearing and counsel (Rule 8.4).
• Settlement or hearing: a respondent may propose a settlement (Rule 8.5); otherwise a Disciplinary Panel holds a hearing (Rules 8.6 and 8.8).
• Decision: the panel issues a written order “based on the weight of the evidence contained in the record,” with findings of fact and conclusions for each allegation, the specific Rule violated, the sanctions and notice of the right to appeal (Rule 8.9).
• Sanctions: from a censure to suspension, a fine of up to $500,000 for each violation, restitution or disgorgement, and termination (Rule 8.10).
• Appeal and publication: an Appeals Panel reviews the record (Rule 8.12), and the exchange reports the action to the NFA within two business days and publishes it (Rule 8.15).⁷

Two other routes sit beside it. A dispute between participants, or a claim against the exchange, goes to binding arbitration in New York (Rules 9.1 and 9.2). A contested outcome, not conduct, runs through the Contract Outcome Review Process, a named-officer review whose determination is final (Rule 10.4). Challenging a settlement or an outcome is in resolution disputes.⁷

Can members of Congress and government officials trade on them?

Some cannot, though the coverage is patchy. CEA section 4c(a)(3) to (4), added by the Dodd-Frank Act in 2010 and extended to Members of Congress, congressional staff and judicial officers by the STOCK Act in 2012, bars federal agency employees, Members of Congress, congressional staff and judicial officers and employees from using position-derived nonpublic information to trade futures, options or swaps, or passing it on.^1,10

On 30 April 2026 the Senate agreed to S.Res. 708, amending Senate Rule 37 to bar Senators, Senate officers and Senate employees from trading event contracts, with an exclusion for “insurance for which the insured holds a lawful insurable interest.” A Senate Select Committee on Ethics “Dear Colleague” letter required holders to divest their event contracts at once. Because it is a Senate Rule, the prohibition does not reach the House, other legislative-branch employees, or the executive or judicial branches.²

What is pending in Congress?

More than a dozen bills, as of 30 October 2026. Some restrict officials’ trading; others would ban whole categories of contract, citing insider-trading risk. All of the bills below are at the committee or subcommittee referral stage, with no floor action.^1,2

There is a route that needs no new statute. The CEA’s section 5c(c)(5)(C), the “Special Rule,” lets the CFTC find an event contract “contrary to the public interest” if it involves, among other things, unlawful activity, terrorism, assassination, war or gaming. In June 2026 the CFTC proposed a rule on public-interest determinations that said contracts open to insider trading could be contrary to the public interest. It is a proposal, not final.^2,11

What would make insider-trading disputes on these markets fairer and faster?

In our view, the shape of the answer is already set by the paper that governs these markets. An event contract lives inside a written rulebook filed with the CFTC, and the alleged wrongs are many, similar and individually small: one account, one market, one well-timed trade. What makes them fair and fast is running each the same way under those rules. The Polymarket US rulebook shows the shape: surveillance flags a trade, the trader is served a notice of charges and gets a chance to respond, and a named panel decides on the weight of the record, with findings of fact, the specific rule it applied, the sanction and a right of appeal. That is the record a court or the CFTC can later rely on. The lesson is to keep a person deciding each case and a record each side can check. The hardest questions here, whether an event contract is a swap and how far Rule 180.1 reaches, are still untested in court, and a clean process is what will survive that test.^1,7

How adjacent decision-making keeps software to a support role, with a person deciding, is in AI in arbitration.¹