Prediction markets raise fears of insider trading. How firms respond

Insider trading is an emerging risk in the new world of prediction markets, and other companies – including Goldman Sachs – they take measures to reduce labor trafficking in social networks.

Goldman Sachs has barred its employees from trading contracts related to events specific to the bank, as well as elections, financial markets, macroeconomic data and geopolitics, according to people familiar with the matter.

A representative for Goldman declined to comment on the policy, but indicated that the bank prohibits the use of sensitive, non-public information to trade in all markets.

While some firms have begun to develop policies to manage the risk of insider trading in the prediction markets, many others have not yet taken those first steps, legal experts say.

“We’re getting constant questions from clients, especially among regulated business clients, about what the regulators’ expectations are, what the risks are, what the potential liability areas are,” said David Oliwenstein, a partner in the securities enforcement practice at Pillsbury.

News of the clear forecast market trading order at Goldman comes after the first case of an insider trading event involving a private equity firm.

In May, the Commodity Futures Trading Commission and the Department of Justice charged Google employee Michele Spagnuolo by using valuable, non-public information to trade Polymarket contracts related to the “Search Year” browser list. Using the handle “AlphaRaccoon,” Spagnuolo allegedly amassed an estimated $1.2 million in profits, according to the CFTC complaint.

Legal experts said the large number of contracts available on prediction platforms could provide new ways for valuable, non-public information to be used for profit.. For example, a Google employee can use internal data to trade contracts on what the company will be a big number this year, when it may release a new version of its Gemini AI tool or anywhere. Letters of the alphabet the share price will end in a month.

“All these different questions that you can bet on… it makes it very difficult to play whack-a-mole in terms of where people are using the information that they’ve obtained privately,” said Karen Woody, a law professor at Washington and Lee University.

Lawyers told CNBC that as more insider traders on these platforms are caught and prosecuted, there will be a greater expectation that businesses have adequate policies and education to avoid any potential liability in a case involving one of their employees.

But lawyers also said they are advising customers that there is no more, and that companies should take this time now to make the necessary policies.

Where companies stand

CNBC reached out to 50 publicly traded and privately held companies, all of which have contracts for information about their businesses in the prediction market.

Overall, only three indicated that they had policies related to trading in prediction markets, while the other two said it was something they were actively reviewing.

United Airlines told CNBC that it does not have a clear policy on predictive market trading, but that its staff guidelines “prohibit you from using your position (or confidential company information obtained from your position) for your own benefit.”

Spokesman for JPMorgan Chase confirmed Barron’s report that employees are being urged to proceed with caution when trading in futures markets – particularly in contracts related to the financial sector.

In Morgan StanleyA spokeswoman said the bank has policies on trading in predictive markets with a code of conduct for employees, but did not disclose further details.

A person familiar with Bank of America’s plans told CNBC that the company was in the process of communicating policy updates that would outline prohibited activities for employees and provide examples to help clarify expectations for trading on social media platforms. The person did not provide details about the specific changes to the policy itself.

Banks appeared to be the sector most likely to respond that they are developing or already have prediction market trading policies.

“Financial institutions have large compliance departments,” said Lara Shortz, a partner at Michelman & Robinson in their practice and employment practice. “They spend a lot of time putting together policies related to the commercialization and use of information.”

In all, 36 companies – including sectors beyond just banking – did not respond to questions from CNBC about labor market forecasting policies. Another seven declined to comment on the matter.

Although CNBC cannot conclude exactly what these businesses did not respond to what they are doing, it is similar to what lawyers who work with companies on internal policy issues say: only a few companies have made major policy changes so far, while many others are in the early stages of any kind of review during the new, explosive rise of the platform.

“Right now, training is not the gold standard, because it’s new,” says Marissa Mastroianni, an employment law attorney at Cole Schotz.

What is already in the books

Some legal experts and company representatives argue that the broad guidelines that prohibit insider trading apply naturally to speculative markets, too. A person familiar with OpenAI’s employee policies said the company’s internal trading policy is clear that employees cannot use sensitive, non-public information in any way.

But Tiffany Magri, a managing consultant at compliance technology firm Smarsh, said companies benefit from clearly stating prediction markets in their policies.

“The question is no longer whether exchanges can detect suspicious transactions,” he said. “It is whether the employers have been sure of what they expect when employees should be prohibited from participating in markets related to the information they encounter in their work.”

To Magri’s point, the leading prediction market platforms Kalshi and Polymarket have taken individual steps to reduce insider trading.

Kalshi, at the beginning of June, announced new tools to ensure the employment of participants in other speculative markets. That same month, it partnered with StarCompliance to allow employers with the partner’s software to access event contracts for their employees. To improve its own internal surveillance, the exchange partnered with Solidus Labs, a market integrity firm, in February.

Polymarket highlighted its partnership in a statement to CNBC. These include one with Chainalysis – a company operating in the on-chain market – and another with Palantir to monitor suspicious activity in its sports-related contracts.

But Magri noted that these are just the first steps, and that companies need to start training employees about the platforms rather than relying on the exchanges themselves to stop insider trading.

Both Kalshi and Polymarket declined to comment if they are working with the companies directly as they develop internal oversight and enforcement mechanisms.

Early days, rapid growth

Companies and the CFTC are jumping into new territory when dealing with insider information about futures markets.

On the prosecution front, Woody said the CFTC has a “blank canvas” on how to proceed after insider trading. “I think what’s going to be interesting about the CFTC leading here is that there haven’t been many cases so far in this space. It’s very new,” he said.

The CFTC did not respond to CNBC’s request for comment on whether it foresees companies being held liable in the future for insider trading by their employees if they are deemed to have failed to adequately educate them about it.

With continued uncertainty on the regulatory side, companies should take the lead in making rules and learn how prediction markets work, said John Sullivan, a professor of management at San Francisco State University.

Lawyers from King & Spalding LLP outlined steps companies can take in a Law360 article. That includes revising their internal trading policies to include event contracts and establishing agreements to monitor unusual activity in individual markets related to their businesses.

In more drastic measures, Sullivan told CNBC businesses should consider blocking company-owned platforms and preventing employees from trading during work hours.

A foolish move would be to dismiss the importance of prediction markets, he said. “It’s a shame that you didn’t do anything or didn’t know about it.”

– CNBC’s Ashley Capoot contributed reporting

Disclosure: CNBC and Kalshi have a commercial relationship that includes customer acquisition and a small investment.