SEC Warns Prediction Markets Over Insider Trading and Market Manipulation

The U.S. Securities and Exchange Commission (SEC) has indicated that prediction market platforms offering contracts tied to companies’ financial results and business performance could come under enforcement scrutiny for potential insider trading, fraud and market manipulation.

SEC Enforcement Director David Woodcock said the regulator was closely monitoring activity across prediction platforms and stood ready to pursue possible securities law violations, according to a Bloomberg report.

“We’re following that very closely,” Woodcock said, adding that the agency must be prepared to intervene when fraud or other securities violations occur. He also indicated that enforcement actions were likely in the future, without naming any specific platform or announcing new cases.

Corporate earnings contracts draw SEC scrutiny

Woodcock’s remarks focused on prediction contracts linked to corporate financial results and key performance indicators (KPIs). These products allow participants to take positions on outcomes such as quarterly earnings, sales figures and other indicators of a publicly traded company's performance.

The regulatory question partly stems from the division of responsibilities between the SEC and the Commodity Futures Trading Commission (CFTC). While the SEC supervises securities markets, the CFTC oversees many derivatives products. Contracts based on the performance of publicly listed companies can therefore raise questions about which regulator has jurisdiction.

The SEC has already approved a proposal from Cboe Global Markets covering binary options tied to corporate performance metrics. The contracts allow traders to speculate on outcomes such as Citigroup’s earnings per share and revenue from Apple’s iPhone sales.

In its approval order, the SEC classified the proposed instruments as options on securities under federal law. However, the decision applies to Cboe’s specific products and does not mean that all prediction contracts linked to corporate performance automatically fall within the SEC’s authority.

SEC and CFTC work to clarify derivatives oversight

The two federal regulators have been reviewing how existing derivatives laws apply to newer financial products.

In June, the SEC and CFTC jointly invited public feedback on the definitions of swaps, security-based swaps and instruments that combine elements of both. Their consultation also addressed market surveillance, coordination between enforcement teams and the treatment of products that could fall under overlapping regulatory mandates.

SEC Chairman Paul Atkins said the agencies were seeking greater clarity around event-based contracts, particularly when traditional financial exchanges and newer trading platforms offer similar products.

The CFTC has also advanced its own regulatory approach. An interim rule excluding casino-style gambling products from the definition of swaps took effect on October 19. Separately, the agency has proposed explicitly classifying certain event contracts linked to sports, politics, culture and weather as swaps. The public comment period for that proposal closes on November 18.

CFTC jurisdiction faces challenges from U.S. states

The CFTC retains primary oversight of federally registered prediction exchanges, including Kalshi and Polymarket’s U.S. operations. However, its authority has increasingly been challenged by state regulators, particularly over event contracts that states argue amount to unlawful gambling.

On October 26, the CFTC filed a lawsuit against Utah in an effort to stop state officials from applying gambling restrictions to federally regulated prediction platforms. The agency also pointed to nine other states involved in similar disputes over the division of authority between federal and state regulators.

Kalshi has separately contested state-level restrictions in several jurisdictions. A September appellate decision involving Ohio and Tennessee added to a series of rulings that have reached different conclusions about how federal derivatives legislation interacts with state gambling laws.

Polymarket faces renewed scrutiny over U.S. access restrictions

Separately, the CFTC is examining whether Polymarket complied with restrictions on access to its offshore platform by U.S. users under a 2022 settlement, according to a Reuters report published on October 27.

The investigation reportedly covers the platform’s geographic access controls, advertising practices and customer protections. Polymarket has maintained that it prevents users from circumventing its location-based restrictions.

Regulatory boundaries could shape prediction market growth

The SEC’s latest comments point to a growing distinction between prediction contracts that function as derivatives and those that may qualify as securities under federal law. As platforms expand into markets tied to corporate earnings and business indicators, the regulatory treatment of individual products could become increasingly important.

The central challenge for U.S. regulators is to establish clear boundaries without leaving opportunities for insider trading or market manipulation. Contracts linked to non-public corporate information may create risks that traditional financial market safeguards are designed to address, even when they are offered through prediction platforms rather than conventional securities exchanges.

The SEC’s willingness to pursue potential violations suggests that regulatory scrutiny may extend beyond the question of which agency oversees a platform to the conduct of traders and the structure of individual contracts. Greater coordination between the SEC and CFTC will therefore be critical in determining how these markets can develop while maintaining investor protections and market integrity.