Inside the Odds

<p>Here is the abstract trimmed to land at 5,000 characters while changing as little as possible:</p> <p>Prediction markets have rapidly moved from regulatory fringe to consequential financial infrastructure, yet the doctrinal and empirical foundations for governing insider trading in these markets remain underdeveloped. This Article argues that the mainstreaming of prediction markets, accelerated by shifts in administrative law and judicial decisions permitting regulated platforms to expand, has produced insider trading risks that neither securities law nor gambling law is equipped to address. Those risks became concrete in January 2026, when a Polymarket trade placed shortly before the U.S. military detention of Venezuelan President Nicolás Maduro, and later geopolitical wagers tied to escalation risks involving Iran, triggered allegations of trading on privileged information and immediate legislative scrutiny. The episode exposed the absence of a coherent legal framework governing informational trading, compounded by ongoing uncertainty over classification. Although prediction markets operate as event contracts under the Commodity Exchange Act within the jurisdiction of the Commodity Futures Trading Commission, state courts have increasingly treated them as unlicensed sports wagering, prompting the CFTC in February 2026 to announce that it would defend federally regulated platforms against state enforcement. Yet existing antifraud and material nonpublic information doctrines, developed for securities markets, do not clearly apply to trading on privileged information about real-world events. As a result, platforms such as Kalshi and Polymarket have assumed responsibility for policing insider trading through private governance, functioning as de facto regulators and increasingly formalizing insider trading prohibitions through internal rulemaking without clear statutory standards. Platform sanctions, state-level restrictions, and formal CFTC enforcement guidance in early 2026 confirm that insider trading concerns are no longer hypothetical. In June 2026, Kalshi announced mandatory employment verification for traders in high-risk markets, a six-factor risk-scoring system applied to every proposed market before listing, and platform-embedded whistleblower tools allowing users to report suspicious activity in real time, demonstrating that private governance is actively evolving in response to enforcement pressure and regulatory scrutiny.</p> <p></p> <p>This Article presents a systematic study of whether regulators and stakeholders recognized insider trading risks in prediction markets before they materialized. It analyzes public comments submitted to the CFTC's 2024 Notice of Proposed Rulemaking using LLM analysis, computational text analysis, and multi-model validation. The findings show that neither regulators nor commenters meaningfully engaged with insider trading risks before they became controversial, revealing a systematic failure of regulatory processes to anticipate informational abuse. Regulatory discourse focused on jurisdictional classification and definitional questions while largely ignoring informational asymmetries that enable insider trading, demonstrating that regulatory frameworks are structurally reactive. The study further shows that market participants cannot be relied upon to identify insider trading risks, undermining disclosure-centered approaches that assume informed, self-policing participation. Building on these findings, the Article develops a typology of insider trading-like misconduct, including trading based on privileged institutional access, temporal informational advantages, manipulation of event probabilities, exploitation of platform design features, and self-referential trading. It situates these practices within existing antifraud and material nonpublic information doctrines and demonstrates that current law fails to clearly prohibit key forms of informational exploitation. Because prediction markets transform informational asymmetries regarding legal, political, and state action into tradable financial assets, failure to address insider trading risks threatens market integrity, institutional legitimacy, and the credibility of probabilistic forecasting as a public information tool. The Article concludes by proposing a governance framework integrating doctrinal clarification, regulatory oversight, and platform-level safeguards before these markets fully integrate into financial and legal systems.</p>