Prediction markets are facing what industry participants and legal experts describe as a stress test ahead of a crowded U.S. midterm election cycle. Thousands of legislative contests, a proliferation of event types and a steep rise in trade volume have combined to produce more opportunities for people with privileged knowledge to profit, raising concerns about whether current safeguards will be effective.
Two of the largest platforms in the space, Kalshi and Polymarket, have seen a surge in activity that has drawn scrutiny from regulators and researchers. Kalshi in April suspended three congressional candidates for placing bets on their own races, and U.S. authorities are probing whether former congressman George Santos engaged in potential insider trading on the platform. Those incidents underscore the practical challenges of policing a market where it can be difficult to distinguish legitimate trading from wagering based on nonpublic information.
At least 6,590 state and federal legislative seats are on the ballot this year, according to the National Conference of State Legislatures. That broad slate of contests, plus myriad local races for offices like district attorney, mayor and judicial posts, generates a large and diverse population of people with access to information that could affect market outcomes - campaign staff, pollsters, fundraisers, donors, family and friends.
"We may see a slow response or we may see no response if and when insider trading happens in the midterms," said Ilya Beylin, a professor at Seton Hall Law School who has examined prediction market oversight. He warned that suspicious activity would erode public confidence in democratic institutions at a time when many Americans already express worry about the system.
Platforms and regulators maintain they are scaling up both technological and operational defenses. The Commodity Futures Trading Commission, which has been asserting jurisdiction over prediction markets, says it has monitoring tools and resources to address the challenge. A CFTC spokesperson said the agency is "continuing to grow alongside" market innovation, both operationally and technologically, and will "enforce the law aggressively."
Platforms have also tightened controls. Kalshi has blocked election wagers by politicians and campaign workers, while Polymarket has stepped up measures against trading on private information. In April, the U.S. Senate enacted a ban preventing members and staff from betting on prediction markets.
Market growth and complexity
Monthly global trading across Kalshi and Polymarket surged nearly fivefold from September to reach about $24 billion in April, the data show. By comparison, roughly $14 billion a month was wagered through legal U.S. sportsbooks last year on average, according to Pew Research Center figures.
That rapid expansion has been accompanied by a change in the character of available contracts. Instead of focusing primarily on winners and losers, exchanges are increasingly listing more granular markets tied to variables within contests - turnout, margin thresholds, candidate dropouts and other specifics. The Anti-Corruption Data Collective (ACDC), a nonprofit research group, reported that during 2024 Polymarket listed 1,293 election-related markets with $7.26 billion in trading volume. The number of U.S. election markets on the exchange fell in a less active year, but the ratio of markets to races rose seven-fold to 17.4, ACDC data show. Michelle Kendler-Kretsch, an ACDC researcher, described that shift as a move toward more esoteric and narrowly focused contracts.
Those niche contracts can create larger information asymmetries because they hinge on specific, often nonpublic variables. Kendler-Kretsch pointed to examples such as markets on the share of "inactive" ballots in a Democratic primary, or other details that are not part of the conventional winner/loser calculus. As the number of potential insiders grows alongside the number of specialized markets, the risk that someone with privileged knowledge could exploit these contrasts increases.
Platform controls and limitations
Exchanges are the first line of defense. Kalshi says it defines an insider as anyone in a position to directly influence a contract's outcome. Robert DeNault, Kalshi's head of enforcement, described a mix of identity checks and public-record searches the company uses to flag federal politicians and campaign staffers before they trade, and said the firm plans similar screening for local races where data permits. Kalshi also monitors for anomalous trading patterns and narrows suspicious activity to a subset for investigation.
Polymarket recently launched a U.S. operation, but its principal exchange remains not U.S.-regulated and historically has not required broad Know Your Customer identity checks. The platform bars U.S. residents, yet authorities have noted those restrictions can be circumvented. Polymarket says it operates a "comprehensive market integrity framework" and pursues transparency. The company has referred nearly 100 user wallets to law enforcement, according to a spokesperson, including one alleged instance in which a U.S. soldier placed an inside bet on the removal of Venezuela's Nicolas Maduro.
Despite these tools, identifying illegal trades remains a human-intensive process. Aitan Goelman, who served as CFTC enforcement director from 2014 to 2017, noted that each lead uncovered by surveillance technology requires human follow-up. The April cases Kalshi flagged illustrate that investigators needed to identify and confirm the users involved.
Regulatory capacity and enforcement questions
While the CFTC asserts it is preparing to meet the challenge, concerns about enforcement bandwidth persist. Budget data indicate CFTC enforcement staffing stood at 105 positions, the agency's lowest level for at least 20 years, and several experienced investigators have departed. Goelman warned that the agency may lack sufficient manpower to pursue a high volume of referrals, even as it continues hiring. The agency spokesperson, however, said it is relying on experienced personnel and has been recruiting continuously since December.
The legal landscape is also unsettled. Insider trading is explicitly prohibited in commodity derivatives markets, but relatively few enforcement cases have been brought, legal experts say. Election-focused prediction markets add complexity because a wide range of potentially material nonpublic information exists around contests - unpublished polls, emerging scandals and internal campaign developments - and some of these forms of information may not be readily understood by regulators or fit neatly into existing legal frameworks. Beylin emphasized that regulators will have to learn through practice, and that such a learning curve often entails trial and error.
Implications for market integrity and public trust
Experts warn that a string of suspicious trades or enforcement failures in election markets could undermine public faith in democratic processes. The combination of more granular markets, a swelling cohort of potential insiders, and substantial trading volumes creates a novel enforcement environment. Platforms are expanding surveillance and identity checks, and regulators are asserting oversight, but both the technical complexity of new markets and resource constraints within enforcement agencies create unresolved questions about the adequacy of these measures.
Policymakers and market operators now face a crucial test in the run-up to the midterms: whether detection, investigation and enforcement mechanisms can keep pace with an expanding universe of contracts and participants, and whether those mechanisms will be sufficient to deter and punish trading that relies on privileged information.
For now, platforms and regulators point to existing controls and recent actions as evidence they are preparing. But observers caution that the combination of higher volumes, more granular markets and stretched enforcement capacity means the medium-term outcome remains uncertain, and that vigilance will be required if prediction markets are to avoid becoming vehicles for unfair trading advantages.