Prediction Markets Pose Threat to Businesses from Inside Traders

Short of being a pain in the backside for gaming regulators, prediction markets are now posing new threats to the integrity of not just sports, but also business. 

This is the surmise of a new warning issued by Steve Silver of labor law firm Littler, who argued that the rise of Kalshi and Polymarket and the variety of prediction markets that they would create would mean that business people may engage in a new way of insider trading that could be difficult to trace. 

Prediction Markets to Tempt Knowledgeable Insiders

Take, for example, Oracle’s wobbling stock, which is more or less dependent on OpenAI, the creator of ChatGPT, the poster boy of the AI revolution. Imagine an insider were to find out that OpenAI is planning to sever its contract for computing power with Oracle, and replace it with, say, Amazon. 

Yet, this is not the only way to make a profit – it need not be a business-ending calamity that exposes industries to prediction market-driven cupidity. 

The insider information traded could be much simpler – the dates for initial public offerings, the rollout of new products, planned mergers and acquisitions, and more. 

Prediction markets could be legally difficult to define, argues Silver, in the sense that confidentiality agreements may not be enough to stop such information from reaching people close to a business’s employees. 

It’s a two-way street, too, adds Silver: “Nor may employees understand the potential legal risks involved from capitalizing on insider information, which in and of itself, is in limbo as the CFTC and the Securities and Exchange Commission (SEC) have not yet set forth a clear regulatory framework for prediction markets.” 

Insider trading is not a new phenomenon, but the onslaught of prediction markets, which are giving you a yes-no option on virtually anything that could (or not) happen, is upping the stakes for companies intent on preserving their integrity and preventing the public and rivals from digging up critical information about them.

However, prominent cases involving such feared insider trading piggybacking on prediction markets have already happened, with a user fetching $1 million on trades that were tied to the release date of new AI models by Google. 

Employers Need to Start Thinking of Counter-measures

Proof is hard to come by, but speculation is swirling, and companies are now more wary of releasing information beyond a very tight group of insiders, especially when it concerns high-stakes products. 

“Employers may want to consider revising Internet and mobile device use policies to specifically block, restrict, or prohibit the use of prediction markets on company devices, using company resources, or while on company time to protect company information and minimize distractions and loss of productivity,” Silver suggests.
It is not just high-tech businesses, though. Recently, a Polymarket bet on a poker tournament was also the reason for controversy.