The second, and perhaps more plausible, explanation for this windfall is that luck had nothing to do with it. The anonymous bettor, in other words, may have known about the attack before it took place.

The term for the latter explanation is insider trading — that is, someone with inside knowledge using nonpublic information to determine where to invest their money. It’s not only unfair to other traders, who are disadvantaged by not having access to the same information as the insider; it’s also blatantly illegal in traditional financial exchanges like the stock market.

But insider trading in prediction markets is legally murkier. While the stock market is regulated by the Securities and Exchange Commission (SEC), prediction markets are regulated by the much smaller Commodity Futures Trading Commission (CFTC). That allows prediction markets to circumvent SEC rules on insider trading, though the CFTC can still enforce antifraud and antimanipulation rules, which could sometimes include what we might consider insider trading.

That leaves online platforms with room to create their own rules on insider trading. Kalshi, a competitor of Polymarket, explicitly prohibits it, while Polymarket’s rules are more vague. But given users’ ability to be anonymous, even those internal rules are easy to evade.

The federal government seems uninterested in the potential dangers of insider trading in prediction markets. The Trump administration has been recklessly friendly to prediction markets by dropping investigations into them. (President Trump’s media group, which runs the social media platform TruthSocial, has even announced plans to launch a prediction market of its own.)

We may never know whether the mystery trader who made $400,000 from the US attack on Venezuela was a government insider. But even if the user is innocent and only benefited from sheer dumb luck, something scandalous would still be going on. It isn’t whether one individual broke the rules; it’s how prevalent anonymity is in prediction markets and how hard it can be to detect insider trading.

The result is that many so-called bets leave little to chance, scamming unsuspecting users. Unlike in casinos or sports books, if you’re wagering on a prediction market, you’re not betting against the house; you’re betting against other bettors. On the surface, that might seem like a more even playing field. But on platforms like Polymarket, you’ll probably be betting against insiders at some point.

What’s most concerning about all of this is that for prediction markets, insider trading isn’t necessarily viewed as a flaw to be corrected but as an asset. One argument for prediction markets is that they can offer a somewhat reliable forecast of the future, and the more nonpublic knowledge that’s used to inform bets, the more accurate that forecast becomes. As Brian Armstrong, the CEO of the cryptocurrency exchange Coinbase, which recently bought a prediction-market firm, has put it: “If your goal is actually for the 99 percent of people trying to get a signal about what’s going to happen in the world — like, ‘Is the Suez Canal going to be reopened?’ or whatever — you actually want insider trading.”

But this is precisely why prediction markets are so dangerous. Not only do they defraud consumers by not ensuring a level playing field; they could also enable a handful of insiders to manipulate major corporate and government decisions.

Imagine, for example, if people in Trump’s orbit place bets on how high the president will set tariffs or whether he’ll issue a certain executive order, based on reliable insider information on policy plans but before the president’s decisions are officially finalized. They might be inclined to lobby the president to follow through on his plans in order to ensure that their bets pay off.

Here’s another scenario. When a member of Trump’s Cabinet gets in hot water and rumors start to swirl about their potential departure from government, a prediction market will inevitably open up on when they will be out of office. For example, Polymarket has a market open on whether Secretary of Defense Pete Hegseth will be out by March 31. As of this writing, the odds that this will happen stand at 11 percent. If Hegseth plans to resign by then, he could ostensibly place an anonymous bet in that market and ensure a big payout for himself on his way out the door. Depending on how lucrative such a bet could be, the secretary might even reconsider the timeline he has in mind for stepping down.

Legislation that’s been proposed to regulate prediction markets doesn’t go far enough to prevent all this manipulation from happening. One bill, for example, would ban federal officials from making trades on prediction markets with insider information. But it’s unclear how that bill would further enforce already existing rules around insider trading and misusing nonpublic information. More than that, user anonymity on these markets would still make any insider trading regulations extremely difficult to enforce.

For now, though, average prediction-market traders — those who make honest bets and no insider knowledge — should give their habit a second thought.

Abdallah Fayyad can be reached at abdallah.fayyad@globe.com. Follow him @abdallah_fayyad.



Source link