In the 1983 film Trading Places, two wealthy brothers set out to rig the commodities market by getting their hands on a secret government crop report. Eddie Murphy’s character uses that stolen preview to trade ahead of everyone else and cash in big. Moviegoers were meant to see it as brazen and clearly illegal. Except it wasn’t.
“People were surprised to learn that that wasn’t a crime,” said Peter Sanchez Guarda, who spent 22 years at the Commodity Futures Trading Commission before leaving in late 2024 and starting up Turnkey Family Office.
The gap the film stumbled into eventually forced Washington’s hand. In the aftermath of the 2008 financial crisis, Congress revised the Commodity Exchange Act to make clear that trading on misappropriated government information was off limits. On Capitol Hill, the change earned an informal nickname: the “Eddie Murphy Rule.” The CFTC later embedded that authority in 17 CFR §180.1, a sweeping anti-fraud provision modeled closely on the SEC’s Rule 10b-5.
Four decades after Trading Places, the twist is hard to ignore. The kind of conduct that once slipped through the cracks has resurfaced in a new venue. It is no longer confined to Wall Street trading desks or the Chicago Mercantile Exchange. Instead, it is playing out on prediction market platforms where users wager on everything from halftime show set lists to the outbreak of armed conflict.
And this time, the watchdogs may be lagging even further behind.
War becomes a tradeable signal on prediction platforms
Prediction markets were once treated as quirky experiments, digital oddities where people could bet on election outcomes or award shows. Lately, they have edged into darker territory. Contracts now track flashpoints involving Iran, Israel, Venezuela and Ukraine. When whispers begin about an airstrike or a troop movement, prices can swing well before any official statement lands.
The other sort of legal principle that underpins this is called the misappropriation theory, where information that belongs to your employer or comes to you as a result of your employment, you get access to, and you trade on that. And you have no right to use that because it came to you through your job.
Peter Sanchez Guarda, former CFTC Special Counsel
One episode involving betting tied to Iran drew particular scrutiny after contracts shifted sharply ahead of real-world events. Similar questions have followed markets linked to Israeli military operations. The suspicion is whether someone with advanced knowledge may have acted before the public caught up.
To Sanchez Guarda, that is where the traditional insider trading framework starts to wobble.
“In securities cases, you know who the usual suspects are,” he told ReadWrite. “It’s the accountant, the lawyer, a few people inside the company, maybe the financial printer. You can round them up.”
Public companies have boundaries. There are corporate officers, compliance departments, and audit trails. When something leaks, investigators can sketch a circle around a finite group.
However, prediction markets do not come with that perimeter.
“If you’re betting on the halftime show, how many people have access to that information?” Sanchez Guarda asked. “You don’t even know who they are.”
Scale that problem up to geopolitics and it becomes almost unmanageable. Knowledge about a military action is rarely confined to a tidy executive suite. It can ripple outward through planners, reservists, contractors, diplomats, intelligence analysts, translators and logistics teams. Even civilians loosely connected to operational planning may pick up fragments.
None of them owes a duty to a prediction market. Some may never have heard of the platform where a contract is trading. Still, information travels and a quiet comment to a friend, a hint dropped in passing, or even a well-timed wager placed online, may suddenly be gold dust.
By the time the public sees headlines, the market may already have moved.
The enforcement gap over insider trading on prediction markets
Legally speaking, the prohibition falls under CFTC Rule 17 CFR §180.1, which bars the use of any manipulative or deceptive device in connection with a derivatives transaction, including trading on misappropriated nonpublic information. Courts can draw on decades of securities law to interpret it.
“So technically, this is illegal,” Sanchez Guarda said. “But it would be very difficult to police.”
The reason is structural. In equities markets, insider trading cases are built on well-worn tools. Regulators issue subpoenas, review email trails, examine brokerage accounts and lean on corporate reporting requirements, hence there is a roadmap.
Prediction markets, on the other hand, flip that script. They are often built around single, novel events. There may be no historical baseline for what “normal” trading looks like.
“You wouldn’t know who they are,” Sanchez Guarda said. “It could be a backup dancer. It could be a security guard. It could be the neighbor of somebody like that.”
The Super Bowl became an unlikely test case. In one widely discussed incident, a trader created an account shortly before the game and placed a series of confident wagers on halftime show specifics, including song choices and order. Every bet hit. Then the account vanished.
Insider trades tend to stand out because they’re bigger than average and weirdly timed.
Matt Bresler, Odditt CEO
On regulated venues such as Kalshi, there are at least some monitoring systems. On crypto-based platforms like Polymarket, oversight can be thinner or nonexistent.
Matt Bresler, CEO of Odditt, said suspicious trades often reveal themselves by their size and timing.
“Insider trades tend to stand out because they’re bigger than average and weirdly timed,” Bresler told ReadWrite, echoing Kalshi’s own public admissions. As Kalshi CEO Tarek Mansour has put it, “people don’t usually commit fraud for $25.”
Even so, the absence of precedent makes surveillance guesswork. Bresler posed a basic question: “How do you define normal trading behavior for a one-off market like whether Barron Trump will attend the State of the Union?”
The uncertainty spilled into public view when Andrew Ross Sorkin pressed Mansour on CNBC with a hypothetical. If a backup dancer knew a performer’s opening song and placed a bet, would that count as insider trading?
There was no tidy response, because the legal architecture was never built with that scenario in mind.
Beyond insider knowledge, there is the possibility of direct manipulation. A contract might hinge on how many times a certain word appears in a speech. The speaker, in theory, could influence the outcome.
“If you’re betting on something like the number of times a word is used in a speech,” Sanchez Guarda said, “and I’m the one giving the speech, I can manipulate that.”
Platforms may prohibit such conduct in their terms of service, but detecting it before payout is another matter. “How would they catch that?” Sanchez Guarda asked.
Add crypto infrastructure to the mix and the trail can go cold fast, as some platforms rely on smart contracts and stress user anonymity.
“If you have the rails of an exchange run by smart contracts and crypto, and the selling point is anonymity, how would you find out who’s behind that?” Sanchez Guarda said.
And even if a regulator does identify misconduct, clawing back funds is not guaranteed.
“If the smart contract says you get paid, you get paid,” he said. “A legal judgment isn’t going to reverse that.”
All of this unfolds as the CFTC faces shrinking resources. At full staffing, the agency is only a fraction of the size of the SEC. Recently, it has been operating with about 20% fewer employees than normal. Reporting has indicated that the CFTC’s Chicago office, long central to derivatives enforcement, has been reduced to a single enforcement attorney.
You know, they are spread too thinly with regard to their traditional markets. But you know, if you’re gonna have these markets that they have to cover, which involves sports betting, how many times a word is said in the speech, who is performing on a certain night, what songs they’re gonna sing. You can bet on anything. How would you have enough people who believe that?
Peter Sanchez Guarda, former CFTC Special Counsel
The scope of what the agency now oversees has ballooned to include contracts tied to sports, entertainment, politics and armed conflict.
“How would you have enough people to police that?” Sanchez Guarda asked.
Prediction markets built on asymmetric information via alleged insider trading
None of this means prediction markets lack value. Sanchez Guarda points back more than a century to Francis Galton and the idea known as the wisdom of crowds. When large groups make independent estimates, their collective judgment can be remarkably accurate.
Prediction markets attempt to formalize that principle by putting money on the line. Participants back their beliefs with cash, and prices aggregate those convictions into a probability.
The system works best when information is widely dispersed and roughly equal.
“If I’m the guy who put the beans in the jar, I know exactly how many there are,” Sanchez Guarda said. “My guess doesn’t carry any more weight than anyone else’s.”
That is the catch. Markets magnify knowledge, but they also magnify advantage. When someone possesses concrete, nonpublic information, the playing field tilts sharply.
“The day before the invasion of Venezuela, a lot of people were betting on that,” he said. “Why did the odds change drastically? Because somebody knew something.”
In some cases, that early signal could be socially useful. A sudden price swing might hint at developments before official channels confirm them. At the same time, it can represent a quiet transfer of wealth from the uninformed to the informed.
Prediction markets are often pitched as groundbreaking financial technology, but Sanchez Guarda is less dazzled.
“What they’re trading is basically a binary option,” he said. “It’s new wine in old bottles.”
The wrapping may look modern, yet the underlying tensions are familiar. As platforms expand into ever more sensitive territory, we have to ask who gets to trade on what they know, and who is left holding the other side of the bet?
In Trading Places, the villains are exposed and the system snaps back into place. On today’s prediction platforms, trades can settle in seconds. Funds can move across borders just as quickly. By the time anyone asks hard questions, the profits may already be locked in.
The closing credits, at least for now, have yet to roll.
Featured image: Insider Trading by Nick Youngson CC BY-SA 3.0 Pix4free.org
