Professor Maurice Tse and Mr Clive Ho

11 March 2026

A prediction market is a speculative market designed to generate forecasts. Profits and losses are tied to the outcome of a specific event (e.g. air strikes by the US and Israel on Iran) or a particular variable (e.g. whether the stock market will rise or fall tomorrow), and the contract’s value is ultimately determined by the result. If the market estimates that Iran has a 75% chance of winning, the relevant contract would be priced at $75. If Iran wins, the contract would settle at $100, meaning that the event has occurred and the probability is now 100%.

The anonymous users of a prediction market platform can bet on all kinds of future events without having to pay any transaction fees as funding mainly comes from investors.

Outcome-based options products as a new “battleground”

With the increasing popularity of prediction markets, Polymarket and Kalshi reached a new high of combined trading volume of US$17.5 billion last month. Even traditional exchanges are considering developing similar functions. For example, Nasdaq has filed an application with the US Securities and Exchange Commission (SEC) to launch binary structured products linked to its Nasdaq-100 Index, with trading prices fluctuating on the basis of the market’s assessment of the likelihood of a particular outcome occurring.

Intercontinental Exchange (ICE), the parent company of the New York Stock Exchange, announced last year that it would invest approximately US$2 billion in Polymarket. Cboe Global Markets, the parent company of the Chicago Board Options Exchange, is reportedly evaluating the relaunch of “all-or-nothing” option contracts.

Prediction market platforms such as Polymarket and Kalshi, which mostly fall under the commodity futures regulatory regime, are under the oversight of the US Commodity Futures Trading Commission (CFTC). Nasdaq’s filing of the above-mentioned application signals a change in the financial market’s attitude behind product innovation. If the application goes through, binary options will become a brand-new product for traditional securities exchanges. Prediction markets will probably be required to adhere to higher compliance standards.

It is worth noting that if Nasdaq’s new contract product is approved for inclusion under the SEC’s regulatory framework, it could mark a significant milestone by allowing prediction-based trading instruments to enter the traditional securities-market structure for the first time. As for the development from the commodity futures framework into the securities regime, it could also bring the jurisdictional boundary between the SEC and the CFTC back into focus. As recently pointed out by the SEC, prediction markets may give rise to overlapping jurisdiction; therefore, regulatory coordination is still necessary.

Constant spectre of insider trading

Media reports and discussions on social platforms suggest that insider trading is far from uncommon in the geopolitical market. In January 2026, a newly created account on a platform bet that Venezuelan President Nicolás Maduro would be ousted from office and made more than US$400,000 in just one day. The incident prompted a US Congressman to introduce the Public Integrity in Financial Prediction Markets Act of 2026, prohibiting federal officials from trading prediction-market contracts tied to government policy. But does the platform in question provide transparent information for users’ reference, or does it serve those with access to confidential information, enabling them to profit from trading information?

Prediction markets assign prices to events that have yet to occur. One important assumption is that the information entering the market is public, but announcements lack a systematic approach, e.g. poll results and corporate performance reports. If a prediction market involves participants holding information that others neither know nor have any way of knowing, it is tantamount to monetizing information asymmetry as a tradable commodity. So long as predictive accuracy relies on leaked confidential intelligence or internal timelines of the government, regardless of the public significance, the market ceases to be an information market and becomes a dark venue for trading in secrets.

Bordering on gambling and testing moral limits

Prediction markets have evolved from a marginal novelty into an independent financial ecosystem that both public and private financial institutions cannot afford to ignore. A Bloomberg survey last year showed that while traditional traders viewed that the financial products in prediction markets had long-term viability. It also highlighted the fine line between investments in these markets and gambling.

A few years ago, Polymarket was banned for operating without registration and was required to pay a US$1.4 million fine to the CFTC before being allowed to return to the US market recently. With the support of multiple Democrats of the House, Ritchie Torres introduced the bill above to ban government personnel from taking advantage of non-public information to trade on prediction markets. The reason for this move is that the timing of such wagers indicates that they are essentially insider trading rather than predictions based purely on publicly available information.

Despite being subject to legal challenges and political pressures, participation in prediction markets shows no sign of decline. In fact, they are now expanding from sports betting to other areas such as corporate earnings. Traditional gambling companies and hedge funds are deploying experts to trade on inefficient pricing.

Last year, Polymarket offered a contract on whether Ukrainian President Volodymyr Zelensky would wear a suit before July, attracting trading volume worth hundreds of millions of US dollars. Although Zelensky eventually showed up wearing a designer black jacket and trousers, the prediction market’s voting result indicated that he was not dressed in a suit. The reason was that a handful of major token holders had wagered heavily on the contrary outcome. Wielding sufficient voting power, they could push through a resolution in their favour.

Prediction markets, as the name suggests, are not about finding the truth but are intended to reach a settlement solution. What most participants believe to be the truth does not matter much. The only outcome that matters is the one ultimately determined by the system, and that process often involves conflicts over money and power. The higher the stakes, the greater the number of competing forces entering the fray, so controversy is hardly surprising.

Legal risks in grey areas

When participants bet on geopolitical events, secret military intelligence is typically known to a few people, leading to severe information asymmetry. The high level of anonymity preserved by market platforms can lure privileged insiders to conduct insider dealing in advance. Distinguishing illegal insider trading from unlawful prediction is never easy, demonstrating the need for tighter regulatory oversight of prediction markets.

Through expansion of the range of tradable assets, prediction markets make nearly anything tradable, thereby broadening the potential sources of valuable insider information. Suppose a secondary school runs a prediction market on this question: “Who will be crowned prom king?” Your friend, the most popular student in the entire grade, privately tells you that he will not be able to attend the prom. If you trade on the basis of this information, would that constitute insider trading? Legally, the issue hinges on whether the trade entails a fraudulent violation of a duty of trust. Any such duty would depend on the context in which the information was disclosed between you and your friend, rather than on any explicit duty to a company or any formal agreement. Accordingly, bringing an insider-trading claim under such circumstances would be extremely difficult.