Prediction Markets and the Compliance Risks Firms Need to Address

Prediction markets have moved from a niche concept to a daily client conversation, and compliance teams are being asked questions they may not have clear answers to. 

If prediction markets have not come up at your firm yet, they will. This article explains what prediction markets are, where the compliance risks sit, and what CCOs should be doing now. 

 What Is a Prediction Market? 

A prediction market is a trading platform where participants buy and sell contracts based on the projected outcome of a specific event. 

Rather than trading stocks or commodities, participants are wagering on whether something will happen — an election result, an economic indicator, a policy decision, or a cultural event. Platforms like Kalshi, Polymarket, and Robinhood’s prediction market offering allow users to take “yes” or “no” positions across a wide range of topics. Prices fluctuate in real time based on market sentiment, and contracts pay out based on the event outcome. Prediction markets are regulated by the CFTC as designated contract markets, but not by the SEC. 

 Why This Is a Compliance Issue 

At first glance, prediction markets may seem outside the scope of a firm’s compliance program because they do not involve securities in the traditional sense. They are not subject to a Code of Ethics in the same way as personal securities trading. Even so, the underlying risks are familiar. In some cases, prediction market activity also intersects with digital assets. For example, certain platforms have used crypto-related infrastructure or tokens, which can bring an additional layer of compliance risk into the conversation. 

MNPI and Insider Trading Risk 

Employees with access to material non-public information obtained through their advisory role could use that information to trade on prediction market platforms in ways that mirror insider trading even if the instruments involved are not technically securities. 

The SEC’s classic insider trading framework may not squarely apply, but the CFTC has its own parallel provisions. CEA Section 6(c)(1) and Regulation 180.1 broadly prohibit fraud and manipulation in connection with commodity and derivatives transactions.  

Conflicts of Interest 

Even absent MNPI, prediction market activity can create conflicts of interest. An employee with a financial stake in the outcome of an event they are also advising on presents a real conflict that existing policies may not explicitly address. 

Policy Gaps 

Most compliance frameworks were not written with prediction markets in mind. 

Does your Insider Trading Policy prohibit trading on MNPI regardless of the instrument? Explicitly enough to cover event-based contracts? Does your Code of Ethics contemplate prediction market accounts? 

These potential gaps are worth identifying now, before a regulator or an incident does it for you. 

 What CCOs Should Do Now 

Prediction markets are not a wait-and-see situation. The regulatory framework is still developing. The compliance risks are not. 

Conduct a risk assessment. 

Identify which employee populations have access to MNPI or are in positions where prediction market activity could create conflicts. Assess whether your current policies provide adequate coverage and document how those decisions were made. 

Review and update your policies. 

At minimum, the following should be evaluated for language that explicitly addresses prediction markets: 

• Code of Ethics / Code of Conduct 

• Insider Trading Policy 

• Personal Trading Policy 

• Training and certification programs 

Take a position. 

Some firms will choose to prohibit prediction market activity outright for certain employee populations. Others may permit it with disclosure requirements or pre-clearance for high-risk roles. Either approach is defensible; having no position and documentation is not. 

Update your training. 

If employees do not know prediction markets are on your radar, they will not think to flag issues or ask questions. Initial and annual training is an opportunity to build awareness before a problem arises. 

 The Time to Act Is Now 

Prediction markets are not a fringe issue. They are coming up in client conversations across the industry, and regulatory attention is growing. 

CCOs who build a defensible position now — documented policies, clear employee guidance, and a compliance program designed to hold up under scrutiny — will be better prepared for what the future holds when the regulatory framework catches up. 

 Build a Defensible Position on Prediction Markets 

Prediction markets require compliance teams to make real decisions quickly and to document them in a way that holds up under scrutiny. Comply helps firms do that by enabling compliance teams to: 

• update policies, Codes of Ethics, and training to explicitly address prediction market activity 

• collect and store certifications, attestations, and disclosure acknowledgments 

• document supervisory reviews, escalation decisions, and risk assessments in one centralized place 

Informal guidance is not a compliance program. Firms that build documented controls and repeatable processes now will be better positioned to respond to regulators, to clients, and to whatever comes next. 

 Frequently Asked Questions 

What are prediction markets and how are they regulated? 
Prediction markets are trading platforms where participants buy and sell contracts based on the outcome of specific events — elections, economic indicators, policy decisions, and more. Platforms like Kalshi, Polymarket, and Robinhood’s prediction market offering fall into this category. They are regulated by the CFTC as designated contract markets, not by the SEC, which means they sit outside traditional securities law — but not outside compliance risk. 

Do prediction markets count as securities? 
No. Prediction market contracts are event-based instruments regulated by the CFTC, not the SEC. That distinction matters for how your policies are written, but it does not eliminate compliance exposure. MNPI misuse and conflicts of interest remain real concerns regardless of how the instrument is classified. 

Can employees trade on prediction markets using inside information? 
Potentially, yes. The SEC’s insider trading framework may not squarely apply to non-securities instruments, but the CFTC has its own parallel provisions: CEA Section 6(c)(1) and Regulation 180.1 broadly prohibit fraud and manipulation in commodity and derivatives transactions. An employee who uses MNPI obtained through their advisory role to trade on prediction markets may face CFTC enforcement exposure even if no securities are involved. 

Should our firm prohibit employees from using prediction markets? 
That depends on your risk assessment. Some firms will prohibit participation outright for employees with MNPI access. Others may permit it with pre-clearance or disclosure requirements. Either approach is defensible. What is not defensible is having no documented position at all. CCOs should assess which employee populations pose the greatest risk and make a deliberate, documented decision. 

What should CCOs do about prediction markets right now? 
At minimum, conduct a risk assessment to identify exposed employee populations, review your policies for gaps, take a documented position on whether and how prediction market activity is permitted, and update training so employees know this is on your radar. The regulatory framework is still developing, the compliance risks are not.