SEC Eyes Manipulation, Insider Risk in Prediction Markets

(Bloomberg) -- Add another regulator to the list of watchdogs monitoring risks in the fast-growing prediction market industry: the Securities and Exchange Commission.

Trades tied to companies' key performance indicators or earnings measures can fall under the Wall Street regulator's turf and SEC Enforcement Director David Woodcock said the agency is watching out for signs of foul play.

"We're following that very closely," Woodcock said in an interview with Bloomberg. "We have to be ready to act when people are committing fraud or committing other securities violations, and I think we are going to be. I suspect you will see activity in that space."

Insider trading and market manipulation are the SEC's main concerns, Woodcock said, adding that enforcement activity is likely "in the future, for sure."

Oversight of prediction markets like Kalshi and the US arm of Polymarket largely falls to the smaller Washington financial regulator, the Commodity Futures Trading Commission, which views the platforms' wagers on everything from sports to elections as financial swaps under its purview.

That agency has brought several prediction market enforcement cases so far this year. Former Congressman George Santos agreed to pay more than $35,000 to settle allegations he manipulated Kalshi wagers and a White House teleprompter operator settled with the CFTC over allegedly using insider information to rack up wins on Kalshi.

In April, the CFTC and federal prosecutors alleged a US soldier used classified information about the timing of the capture of then-Venezuelan President Nicolás Maduro to make more than $400,000 on Polymarket. That case is ongoing and the soldier has pleaded not guilty.

Kalshi and Polymarket have said they are against insider trading, monitor their platforms for potential risks and flag suspicious activities to regulators.

The CFTC views the platforms as derivative exchanges but some states argue prediction markets are illegal gambling operations shirking local laws. That has led to a high-stakes legal fight that will likely end up at the US Supreme Court.

Trading products become the SEC's turf when they are tied to securities. The agency put out a joint request for comment with the CFTC on the definitions of certain swaps and derivatives products as part of a bid to clarify the two agencies' jurisdictions.