Prediction markets spark insider trading fears. How firms are responding

Insider trading is an emerging risk in the new world of prediction markets, and some companies, including Goldman Sachs – we take steps to limit employee transactions on the platforms.

Goldman Sachs has banned its employees from trading on contracts related to elections, financial markets, macroeconomic data and geopolitical issues, as well as events specific to the bank, according to sources familiar with the matter.

A representative for Goldman declined to comment on the policy but noted that the bank prohibits the use of material, nonpublic information to trade in all markets.

Legal experts say some firms have begun developing policies to manage insider trading risks in prediction markets, while others have not yet taken those initial steps.

“We get questions all the time from our clients, particularly regulated entity clients, about what the regulators’ expectations are, what the risks are, where the potential areas of liability are,” said David Oliwenstein, partner and securities practice practice leader at Pillsbury.

News of an open prediction market trading directive from Goldman comes in the wake of the first-ever contract insider trading case involving a privately held company.

In May, Commodity Futures Trading Commission And Ministry of Justice Google employee accused Michele Spagnuolo Use of material, non-public information to transact Polymarket contracts related to the browser’s “Search Trends of the Year” listings. According to the CFTC’s complaint, Spagnuolo allegedly made approximately $1.2 million in profits using the handle “AlphaRaccoon.”

The multitude of contracts available on forecasting platforms could provide new avenues for material, non-public information to be used to generate profits, legal experts said.. For example, a Google employee could use internal data to execute contracts about what the company’s headcount will be this year, when it might release a new version of its Gemini AI tool, or where it will be located. alphabet The share price will be at the end of the month.

“All these different questions that you can bet on make it really difficult to play whack-a-mole about where people use their privately obtained information,” said Karen Woody, a law professor at Washington and Lee University.

Lawyers told CNBC that as more insider trading is caught and prosecuted on these platforms, expectations will increase that businesses have adequate policies and training to avoid any potential liability in a case involving one of their employees.

But the attorneys also said they are advising their clients that it is in no way too late and that companies should take the time now to develop the necessary policies.

Where companies stand

CNBC reached out to 50 companies, public and private, that have contracts on prediction market platforms detailing their business.

Only three in total disclosed that they had policies regarding trading in prediction markets, while the other two said it was something they were actively looking at.

United Airlines He told CNBC that he doesn’t have a clear policy on prediction market trading, but that employee guidelines “prohibit using your position (or company confidential information obtained from your position) for personal gain.”

a spokesperson JPMorgan Chase verified Barron’s report Employees are asked to exercise caution when trading in prediction markets, especially contracts related to the financial sector.

On: Morgan StanleyA spokesman said the bank’s employee code of conduct includes policies regarding trading in prediction markets, but did not disclose further details.

A person familiar with Bank of America’s plans told CNBC that the company is in the process of pushing out policy updates that will outline prohibited activities for employees and provide examples to help clarify trading expectations on prediction market platforms. The person did not elaborate on specific changes to the policy itself.

Banks appear to be the sector most likely to respond that they have developed or have already implemented prediction market trading policies.

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

Overall, 36 companies, including from industries other than banks, did not respond to CNBC’s questions about their employee prediction market trading policies. seven more He declined to comment on the matter.

While CNBC can’t pinpoint exactly what these unresponsive businesses are doing, it lines up with what lawyers who work with the companies on domestic policy issues have said: Only a handful of companies have made major policy changes so far, while many others are still in the early stages of any form of updates amid the platform’s new, explosive rise.

“Education right now isn’t necessarily the gold standard just because it’s new,” said Marissa Mastroianni, an employment law attorney at Cole Schotz.

What’s in the books anyway?

Some legal experts and company representatives have argued that broad directives prohibiting insider trading inherently apply to prediction markets. A person familiar with OpenAI’s employee policies said the company’s general insider trading policy is clear that staff cannot use material, non-public information in any way.

But companies benefit from explicitly mentioning prediction markets in their policies, said Tiffany Magri, regulatory counsel at compliance technology company Smarsh.

“The question is no longer whether exchanges can detect suspicious transactions,” he said. “This is whether employers establish clear expectations about when employees should be prohibited from participating in markets based on the information they encounter in the course of their work.”

According to Magri, leading prediction market platforms Kalshi and Polymarket have taken steps on their own to curb insider trading.

Kalshi announced new employment verification tools for participants in some prediction markets in early June. He became a partner in the same month Star Compatibility Allowing employers with the partner’s software to access their employees’ event contract transactions. To strengthen its internal audit, the exchange has partnered with: Solidus Laboratoriesin February, a market integrity company.

Polymarket highlighted its own partnerships in a statement to CNBC. These include: chain analysis — an on-chain market execution company — and another company that monitors suspicious activity along with Palantir sports related contracts.

But Magri noted that these are only first steps and companies should start educating their employees about the platforms, rather than relying on the exchanges themselves to stop insider trading.

Both Kalshi and Polymarket declined to comment on whether they were working directly with the companies as they developed their internal audit and enforcement mechanisms.

Early days, increasing urgency

Companies and the CFTC are diving into new territory as they confront insider trading in prediction markets.

On the prosecution front, Woody said the CFTC has a “blank picture” of how to proceed in the wake of insider trading. “I think what’s going to be interesting with the CFTC taking the lead here is that there haven’t been a lot of cases in this area to date. It’s pretty new,” he said.

The CFTC did not respond to CNBC’s request for comment on whether it intends to hold employees accountable for insider trading in the future, given that companies have not adequately trained their employees on the issue.

With ongoing uncertainty on the regulatory side, companies need to take the lead on rulemaking and learn how prediction markets work, said John Sullivan, a management professor at San Francisco State University.

Lawyers from King & Spalding LLP steps outlined Companies can get articles on Law360. These include updating insider trading policies to include activity contracts and establishing protocols to monitor unusual activity in individual markets relevant to their business.

For even tougher measures, Sullivan told CNBC businesses should consider banning platforms from company-owned devices and prevent employees from trading during business hours.

The foolish move, he said, would be to ignore the interest of prediction markets. “It’s a shame to do nothing or not know about it.”

— CNBC’s Ashley Capoot contributed reporting

Disclosure: CNBC and Kalshi have a business relationship that includes customer acquisition and minority investment.