Know the Outcome? Don't Trade: CFTC Puts Prediction Markets on Notice

In an unusual move, the Commodity Futures Trading Commission’s (CFTC or Commission) Division of Enforcement (Division) issued an advisory (Advisory) on February 25, 2026, highlighting two disciplinary actions brought by Kalshi, a self-regulatory organization (SRO) and designated contract market (DCM), against two of its members involving the misuse of material nonpublic information (MNPI) and fraud in connection with prediction markets.[1] The announcement comes as Kalshi publicly disclosed details of two insider trading investigations it recently closed, emphasizing its commitment to market integrity.[2] 

The two cases involved instances in which traders allegedly knew the outcome before they traded, either because they could control it or because they knew the outcome of the event subject to the underlying contract prior to its public release. While the Advisory did not indicate the Division would undertake parallel enforcement proceedings for this alleged misconduct, the Division emphasized that this type of alleged misconduct would likely violate the Commodity Exchange Act (CEA) and CFTC regulations. Most notably, with issuance of the Advisory, the Commission is signaling to market participants that, in certain circumstances, the CFTC will actively investigate and prosecute fraud and insider trading in prediction markets moving forward, consistent with the CFTC’s view that event contracts are swaps and are, therefore, subject to its exclusive jurisdiction.[3] 

The Candidate

The first case involved a California gubernatorial candidate (Candidate) who placed two trades on Kalshi-listed event contracts referencing his candidacy. Then it made social media posts promoting him trading the contract.[4] Kalshi investigated the conduct quickly, and the Candidate “acknowledged that he knew these trades were improper and violated Kalshi's rules, which prohibit trading in a contract over which the trader has direct or indirect influence over the outcome.” Kalshi suspended the Candidate’s exchange access for five years and fined him $2,246.36, comprising disgorgement of $246.36 related to the improper trading activity plus a $2,000 penalty. 

The YouTube Editor 

The second case involved an editor for a YouTube channel (Editor) who had advance knowledge of the contents of the channel’s videos prior to the time they were publicly posted and traded on contracts related to the content of those videos.[5] The Editor’s “near-perfect trading success on markets with low odds” was “statistically anomalous” and alerted Kalshi to investigate.[6] The Editor failed to cooperate with Kalshi’s investigation and received a two-year suspension and a fine of $20,397.58, comprising disgorgement of $5,397.58 in profits plus a $15,000 penalty.

CFTC Oversight and Enforcement Moving Forward

The Advisory made clear that while “Kalshi's internal enforcement program handled these matters, under the [CEA], the Commission has full authority to police illegal trading practices occurring on any DCM, including those described above related to prediction markets.” The Division emphasized it “will investigate and prosecute violations, as it always has with respect to conduct occurring on DCMs” and “continues to coordinate with DCMs regarding their enforcement dockets and referral of appropriate potential violations to the Division for investigation.” While it is unsurprising that the Division declined to take any enforcement action against the respondents in these matters, given the relatively small volume of trading and dollar amounts traded, the Advisory — which is unique in kind — appears to respond to recent criticism that the CFTC’s enforcement apparatus is unequipped to investigate insider trading on prediction markets.[7] The Advisory notably highlights that its DCMs are SROs, meaning they are deputized by the Commission to bring enforcement actions of their own for misconduct occurring on their platforms, and the Commission appears inclined to investigate and bring enforcement actions on its own.

The Advisory also suggests that the Candidate’s alleged misconduct may constitute fraud or a manipulative scheme or artifice to defraud, similar to the Division’s prior enforcement matters related to pump-and-dump and other unlawful schemes.[8] Additionally, the Division indicated that the Editor potentially violated prohibitions on misappropriation of confidential information in breach of a pre-existing duty of trust and confidence (i.e., insider trading under the CEA), similar to a number of matters the Division has brought related to employees or brokers taking advantage of employer or customer order information in order to engage in frontrunning.[9] The Division’s framing of the Candidate’s alleged misconduct as a potential form of fraud and manipulation, and the Editor’s alleged misconduct was a potential misuse of non-public information violating a pre-existing duty of trust and confidence, reaffirms the limits of what constitutes “insider trading” under the CEA and the CFTC’s regulations. Unlike the Securities and Exchange Commission’s (SEC) authority to prosecute insider trading in the securities markets, the CFTC has traditionally permitted derivatives “market participants to trade on the basis of lawfully obtained material nonpublic information.”[10] Future cases brought by the CFTC may raise more complex legal questions about whether a market participant is permissibly trading on MNPI in prediction markets. 

Given the rising popularity of prediction markets across the country, it should come as no surprise that the Commission intends to police misconduct in these markets, ensuring both that SROs continue to enforce their rules and monitor for market abuse and the misuse of MNPI. At the same time, the Commission is letting market participants know that, should more egregious misconduct occur on prediction market exchanges, the CFTC will investigate and potentially fine those who choose not to follow the law.  

Katten on Prediction Markets

Katten is continually monitoring for the latest developments regarding prediction markets. Visit our Prediction Markets topic or check out our latest analysis below:

• Chairman Selig and the CFTC Make the Case for Federal Jurisdiction Over Prediction Markets
• Federal Reserve Researchers Find Prediction Markets Deliver Forecasting Value Comparable to Professional Surveys and Futures
• Touchdown or Tax Down? – How Will the IRS View Sports Contract Gains and Losses
• SDNY US Attorney Clayton Cautions Enforcement Activity Could Be Coming to Prediction Markets