By Anirban Sen
NEW YORK, May 15 (Reuters) - Top prediction market platforms Kalshi and Polymarket have witnessed a surge in suspicious trades this year, highlighting the popularity of the models with investors
but causing a challenge to the platforms as they face increased scrutiny.
The surge in suspicious bets comes as trading volumes on prediction markets have jumped, at a time when the platforms are taking more measures to crack down on insider trading after facing heat from lawmakers.
Since the start of this year, Kalshi has probed and flagged more than 400 suspicious trades, more than twice the number of trades that the platform investigated all of last year, two sources familiar with the matter said. One of those sources added that some had been flagged to the derivatives regulator, the Commodity Futures Trading Commission, without giving specifics. The CFTC did not immediately respond to a request for comment.
Similarly, Polymarket has also witnessed a significant uptick in the volume of trades that have been flagged as suspicious since the start of this year, a third source said, without giving specifics.
But it can be tricky to identify bad actors on such platforms.
"In the world of corporate insider trading it is often relatively easy to identify the parties with access to material nonpublic information who might trade in violation of the law," said Stanford Law School professor Joseph Grundfest, who is a former commissioner of the Securities and Exchange Commission. "But equivalent data is often very difficult or impossible to collect in connection with some prediction markets."
The rise in suspicious trades comes as trading on the platforms, which were both founded less than a decade ago, has surged. On Kalshi, annualized trading volumes have more than tripled over the past six months to $178 billion, the company said earlier in May. Polymarket's monthly notional trading volumes across its offshore exchange and U.S. platform touched roughly $10.3 billion in April, compared to $3.8 billion during the same period last year, according to Dune Analytics data.
At the same time, trading platforms themselves are adding guardrails and safeguards to prevent illegal activity, including a recent move to prevent federal employees from trading on political campaigns that they work for. Regulation of the prediction markets is currently the focus of a jurisdictional battle between the CFTC, which argues it should regulate them as derivatives markets, and individual states.
Still, the increase in suspicious trading also shows that investors are willing to take risks to score wins, experts said, given the lucrative payday riding on successful bets on the outcomes of certain events.
The increased interest in the platforms has helped drive up their valuations. Kalshi recently closed a $1 billion fundraise that valued the startup at $22 billion, representing a more than tenfold surge in its valuation in less than a year. Polymarket, which is scrambling to roll out its U.S. exchange after delays with the launch earlier this year, has been in talks to raise fresh funding at a valuation of $15 billion, according to a separate source familiar with the matter.
The rising scrutiny on prediction markets also comes on the heels of other recent well-timed market bets on falling oil prices before a major Iran-policy announcement from the Trump administration.
SURGING POPULARITY
Investors have increasingly turned to prediction market trading venues before crucial buy-and-sell decisions, as they have sometimes emerged as an accurate indicator of outcomes tied to events like economic policy announcements or elections, often edging out traditional public opinion polls.
The markets are platforms where users buy and sell binary 'yes' or 'no' contracts tied to the outcome of a wide array of events, ranging from economic policies to elections to sports.
"Economically, the nature of these markets is such that they let you trade not on the market reaction to news, but on the actual news - so there's less risk," said Vincent Gregoire, a professor at business school HEC Montreal.
Kalshi was founded in 2018 by Massachusetts Institute of Technology classmates Tarek Mansour and Luana Lopes Lara. Polymarket, launched in 2020 by Shayne Coplan during the height of the pandemic, started as a crowdsourced forecasting experiment that has grown into a full-fledged event contracts exchange over the past few years, generating several billion dollars worth of trades every month.
However, some recent high-profile insider trading cases have put the platforms under increased scrutiny. A U.S. Army soldier was recently charged with winning $400,000 by using confidential information to place a bet on Polymarket on the removal of ousted Venezuelan President Nicolas Maduro. In April, Kalshi banned three U.S. congressional candidates for "political insider trading."
CFTC Chair Michael Selig told lawmakers recently that his agency would aggressively prosecute insider trading. The CFTC in March began the process of crafting prediction market regulations.
In response to the scrutiny from lawmakers, both Kalshi and Polymarket recently updated their rules to highlight that certain types of bets, which included wagers made using confidential information and illegal tips, would not be allowed on their respective platforms. Polymarket recently removed some war-related bets and contracts following public scrutiny.
"If someone has insider information, they might be way more inclined to act on it on prediction markets than on equity markets," said Charles Martineau, a professor at the University of Toronto's business school.
(Reporting by Anirban Sen in New York; Editing by Megan Davies and Nick Zieminski)
