Once I heard the news that NBA star Giannis Antetokounmpo had invested in a “prediction market,” my interest was piqued and I learned that these decentralized platforms can be used for anyone to wager on company-specific events. A wide range of company specific events. Think quarterly earnings. Product launch dates. Officer or director resignations.
It sure seems that anyone with non-public knowledge can open themselves up to the type of risk that insider trading laws are designed to prevent. Bear in mind that one of these prediction markets – which bans insider trading on its platform – recently described how two insider trading investigations had just been closed to give us a flavor how they police activity – the investigations wound up with one person being fined by the platform with a referral to the CFTC and the other person being suspended from the platform. Note that over the past year, that platform had opened 200 investigations – over a dozen of which became active cases – and frozen a number of flagged accounts.
From a regulatory standpoint, there is the potential a turf war between the SEC and CFTC as these predication markets arguably could be deemed to be dealing with commodities. However, SEC Chairman Paul Atkins delivered testimony before the Senate Banking Committee in which he said the legal status of prediction markets isn’t always clear – and that jurisdiction over them overlaps between the SEC and the CFTC.
Plus we now have a memorandum of understanding that the SEC and CFTC recently inked that signals cooperation between the two in regulating the crypto markets – so the two agencies are working together in a way they haven’t before.
Layer on top of this Nasdaq’s recent filing seeking approval from the SEC to roll out prediction markets options on a major stock index, which follows in the footsteps of Cboe Global Markets and CME Group. Things are heating up fast in this new sector.
Given the SEC’s interest in this area – and the opportunity for your insiders to potentially land themselves in hot water – companies might want to start thinking about modifying their policies to more clearly prohibit the use of confidential information to trade in prediction markets.
For many companies, these markets are likely covered under existing codes of conduct and insider trading policies but covering it expressly puts employees on notice, which is the point. Companies should consider revising their annual code training or insider trading policy training to include an example that includes the prediction markets to help educate employees.
Authored by
Broc Romanek