After the United States and Israel began strikes against Iran, news reports highlighted a Polymarket prediction account that earned roughly $553,000 by betting on the removal of Iran’s supreme leader, Ayatollah Ali Khamenei. This prompted public questions that frequently arise around high-stakes prediction markets: When does trading on superior information become “insider trading,” and how should we think about this concept when the contract is not a share of stock but a prediction-market claim?

Prediction markets (such as Kalshi and Polymarket) allow participants to trade contracts tied to specific outcomes. A common structure is a binary (“Yes/No”) contract that pays $1 if an event occurs and $0 otherwise. The trading price is typically between $0 and $1 and is often interpreted as the market’s implied probability of the outcome, though market prices can also reflect liquidity, risk preferences and trading frictions. 

While the predictions can be about a variety of different types of events, they have recently gravitated toward sports betting (as a means to circumvent the gambling and tax laws in many states) and geopolitical events.

This article clarifies what “insider trading” means in U.S. securities law, what kinds of information advantages are legal and what makes prediction markets distinct, especially in markets tied to geopolitics, national security or violence.

Insider Trading: What It Is (and Isn’t)

In U.S. securities regulation, “insider trading” is not simply “trading on information that others don’t have.” Illegal insider trading generally involves trading securities while in possession of material, nonpublic information in breach of a duty of trust or confidence owed to the source of that information.  A simple illustration is a corporate employee who learns, through internal channels, that the firm will announce a major acquisition, then buys stock ahead of the public announcement.  In this case, the employee breached their duty of trust, used nonpublic insider information, and traded securities for gain.

But an advantage gained through lawful research, skill or public observation is not typically “insider trading” in the securities-law sense. Markets routinely reward participants who are faster, more analytical or better at inference. Think of hedge funds and institutional investors using satellite images of parking lots to predict sales at big box retailers. 

Similarly, a trade conducted by a corporate executive is not automatically an illegal insider trade. The vast majority of trades made by insiders follow standard disclosure rules, even if the executive knows more about the company than the typical investor. Thus, being an insider does not preclude you from conducting trades. However, it does preclude you from acting on this material non-public information.

It is also important to distinguish insider trading from other forms of illegality, such as trading on information that was obtained through bribery, hacking, theft, coercion or contract/ethics violations. Conduct may be unlawful even if it does not map neatly onto the securities-law concept of insider trading, which is where some of the concerns have recently arisen as it pertains to insider information and prediction markets.

Prediction Markets and the “Insider Trading” Question

Prediction markets differ from traditional securities markets in ways that can make information misuse harder to evaluate. First, many prediction contracts are event-specific and often tied to a precise time window. For example, Kalshi recently offered a prediction market on whether Kristi Noem would be out as secretary of homeland security before July 1, 2026. If an insider had any indication Noem would be removed, that person could quickly take the “Yes” side for a nearly guaranteed profit. 

Second, there is an almost unlimited potential variety of tradable contracts.  For example, on Kalshi there are contracts for: “Costco raises hot dog combo price?” and “Will Taylor Swift meet with Pope Leo XIV before 2027?”  Somebody who works at Costco’s corporate office or has access to Taylor Swift’s schedule could conceivably design or bet on predictions with more certainty of the outcome. With this diversity of contracts, it becomes easy to see how the number of individuals who have privileged information expands almost exponentially.  

Third, the legal category is not always straightforward. The insider trading doctrine was developed primarily for traditional securities markets. Prediction-market contracts likely fall under federal regulation (similar to regulation on sports gambling) where acting on material insider information can be considered wire fraud, illegal gambling schemes and using insider information for fraudulent betting. While these offenses can carry severe penalties and jail time, they also can be more difficult to prove than insider trading in traditional securities markets. 

Fourth, public inference is genuinely hard to rule out in geopolitical contexts. On its own, a profitable and well-timed bet does not establish that the trader possessed improper information. Proving illicit trading typically requires evidence of how the trader obtained information and whether it involved a prohibited duty or breach.

In January 2026, Kalshi banned a trader who was affiliated with the Mr. Beast YouTube channel for allegedly making bets on what Mr. Beast would talk about in future episodes. But far more seriously, individuals have also been arrested in Israel for allegedly using classified information to trade on Polymarket contracts that predicted when Israel would strike Iran.

What are Prediction Markets and Regulators Doing About Insider Risks?

Prediction market platforms try to manage insider-information risk and war/death sensitivities through a mix of market-design limits, participation rules and compliance actions. On the war/death side, U.S. commodity trading law treats wagers tied to death and war as problematic because they can create financial rewards for violence and instability, and U.S. law can prohibit wagers “contrary to the public interest,” including those involving or relating to war or assassination. 

In practice, platforms may respond by refusing to list contracts “directly tied to death,” or by writing resolution rules that prevent profiting from death; for example, Kalshi paused trading and refunded fees in a Khamenei-related market. 

“We don’t list markets directly tied to death,” said Kalshi CEO Tarek Mansour, citing  rule designs intended to prevent people from profiting from death. 

On the insider-trading side, Kalshi says it actively monitors for insider trading. The company has partnered with many third-party vendors that help sports leagues scan for potential trading integrity issues. It is fair to question what type of oversight these vendors can exercise on more obscure outcomes where insider information can be very beneficial. When trading occurs on offshore venues or with tools that conceal user location, oversight and auditing may be more difficult.

Prediction markets can aggregate dispersed beliefs into a single probability-like signal, which may be useful for forecasting and decision making. At the same time, certain types of contracts, especially those tied to sensitive geopolitical events, raise recurring questions about information misuse, enforcement feasibility and ethical boundaries.  Furthermore, the regulatory infrastructure for tracking and prosecuting insider trading in the U.S. is harder to apply to prediction markets, increasing the potential for insider trading in these markets.

This post was originally published in Poole Thought Leadership.