Client Alert: Beware the “Duty Free Zone”: Prediction Markets and Insider Trading

April 9, 2026

These past few months, it has been all but impossible to miss the public debate around the explosion in popularity of “prediction markets” or “event-based markets.” These contracts, traded on Designated Contract Markets (DCMs) like Kashi, Polymarket, and Crypto.com, allow users to speculate on events from sports to weather to politics. It is inevitable that as these markets become more popular and liquidity deepens, the temptation for insiders to wrongfully trade on “misappropriated” information will become too strong for some to resist. Some of the public concern about the popularity of these markets has centered around “insider trading,” with market observers pointing out suspicious trades in advance of news events.

Here, we explain how the Commodity Futures Trading Commission (the “CFTC”) thinks about “insider trading” in these markets, and what companies and organizations need to do to make sure that someone stealing its secrets to trade could face repercussions.

I. Background on Prediction Markets

Prediction markets are online platforms that allow users to buy or sell contracts with payoffs tied to the occurrence or nonoccurrence of specific events, ranging from the mundane to the genuinely novel. Such events include the outcomes of sporting events, weather patterns, and legal proceedings – including, notably, the fate of Kalshi’s own pending litigation.

In the U.S., these contracts are classified as cleared Swaps, because they are agreements, contracts, or transactions that “provide[s] for any purchase, sale, payment, or delivery […] that is dependent on the occurrence, nonoccurrence, or the extent of the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence.” 7 USC § 1a(47)(A)(ii). In order to trade Swaps as a retail user, trading must occur on platforms that are registered as DCMs. DCMs are exquisitely regulated; among other things they must demonstrate compliance with 23 Core Principles laid out in Section 5(d) of the Commodity Exchange Act (CEA) and Part 38 of the CFTC Regulations, one of which is the establishment and maintenance of a system designed to prevent market manipulation. DCMs must maintain their own rulebooks, systems, and staff dedicated to prohibiting, detecting, and punishing manipulative, fraudulent, or abusive trading. Accordingly, such trading is policed both at the exchange level by DCMs supervising their own markets, and by the CFTC.

II. Insider Trading

In public remarks at New York University on March 31, 2026, the Director of Enforcement David I. Miller warned that insider trading rules apply to prediction markets and confirmed that the agency is actively monitoring suspicious activity. ¹ Director Miller’s remarks constitute a clear reminder that the CFTC intends to apply existing market abuse frameworks to these platforms, as regulatory scrutiny of the prediction markets sector continues to intensify.

There is no “material non-public information” in commodities markets, like there is in the stock market. However, the legal underpinning of the prohibitions on “Insider Trading” is similar under the CEA and securities laws. For there to be a violation, both frameworks require a trader to be wrongfully using misappropriated information – information stolen from an employer or client, for example, or wrongfully used in some violation of a duty.

A. Section 6(c)(1) and Rule 180.1 the Operative Prohibitions

Section 6(c)(1) is the primary vehicle for insider trading enforcement. Section 6(c)(1) makes it unlawful for any person to use or employ any manipulative or deceptive device or contrivance in connection with any swap, or a contract of sale of any commodity in interstate commerce, or for future delivery. The language is deliberately modeled on Section 10(b) of the Securities Exchange Act of 1934, which is the foundation of all securities insider trading law. Pursuant to Section 6(c)(1), the CFTC promulgated Rule 180.1.

Rule 180.1 is explicitly modeled on SEC Rule 10b-5 and is a broad, catch-all anti-fraud provision. The CFTC interprets Rule 180.1 to prohibit trading on the basis of material nonpublic information (“MNPI”) in breach of a pre-existing duty of trust and confidence owed to the source of that information.

The three elements required to establish a violation under the misappropriation theory (as confirmed by Director Miller in his March 2026 speech² are:

The person possesses MNPI
The person misappropriates that information by trading on it or tipping others, in breach of a duty of trust and confidence owed to the source of the information
The person acts with scienter (intent to defraud or recklessness as to the wrongfulness of the conduct)

B. The Misappropriation Theory of Liability

The misappropriation theory of liability is the operative theory at play in an analysis of insider trading under the CEA. Under this theory, which is drawn from United States v. O’Hagan, 521 U.S. 642 (1997), fraud occurs when a person misappropriates confidential information for trading in breach of a duty owed to the source of the information. There need not be any relationship between the trader and the counterparty, only that the trader is breaching a duty to whoever entrusted them with the information.

A legally cognizable “duty of trust and confidence” may arise from any of the following sources:

Employment agreements and duties of loyalty (the most common source³
Confidentiality agreements and NDAs⁴
Company policies, codes of conduct, and employee handbooks⁵
Regulatory and exchange rules⁶
Customer agreements⁷
Government employment⁸

The largest takeaway is that no formal fiduciary relationship is required, any legal duty of trust and confidentiality will suffice.⁹

Liability also extends beyond the trader who utilizes misappropriated information. It applies equally to the tipper, the tippee, and those aiding and abetting¹⁰ the violation. With respect to employer and principal liability, companies may face vicarious liability for the conduct of their employees and agents under CEA § 2(a)(1)(B), even where such conduct was expressly prohibited by internal policy. An important distinction applies, however: not all trading on MNPI is prohibited. Where the information at issue was not obtained in violation of a duty of trust and confidence, there is no misappropriation, no fraud, and no insider trading violation under the CEA.

Director Miller made this clear in his March 2026 remarks that the CFTC will pursue only those who “tip or trade with misappropriated information,” information taken in violation of a legal obligation. The agency does not seek to prohibit all trading on nonpublic information. Derivatives markets have long permitted participants to trade on the basis of lawfully obtained MNPI; the hedging function of futures markets depends on it. What the CFTC targets is the specific, duty-breaching conduct that the misappropriation theory reaches.

C. Applying Theory to Practice

In application, the misappropriation theory hinges on whether the information was obtained through a relationship that includes a duty of trust and confidence. If your company shares sensitive information with a person who has no pre-existing duty of trust and confidence to you, and that person trades event contracts on a prediction market based on what they learned, they may not have committed insider trading. This remains true regardless of the harm caused to your company – the absence of a predicate duty means the conduct falls outside the reach of CFTC enforcement.

The employment relationship itself creates a duty, but that relationship-based duty extends only to employees. For everyone else, contractors, consultants, agents, vendors, the duty must be affirmatively created by contract or agreement. It does not arise by operation of law from the mere receipt of information.

The practical implication is direct: if you share information with anyone who might trade prediction market contracts, you will need a written instrument that (1) creates a duty of trust and confidence and (2) expressly prohibits trading on that information. Without it, you may be inadvertently creating a “duty-free zone,” leaving yourself vulnerable to harm that extends beyond the reach of insider trading enforcement.

III. Contact Us for More Information

We are available to assist clients in assessing how this development applies to their specific circumstances. Please reach out to Michael Frisch (mfrisch@crokefairchild.com) or Bakhtawar Mirjat (bmirjat@crokefairchild.com) with any questions about these developments.

References

¹David I. Miller, Dir. of Enforcement, Commodity Futures Trading Comm’n, Remarks at NYU Law School – CFTC Enforcement Priorities, Insider Trading in the Prediction Markets, and Cooperation with the CFTC (Mar. 31, 2026), https://www.cftc.gov/PressRoom/SpeechesTestimony/opamiller1

²Id.

³See, e.g. In re Arya Motazedi, CFTC Docket No. 16-02 (Dec. 2, 2015); In re Jon P. Ruggles, CFTC Docket No. 16-34 (Sept. 29, 2016); In re Marcus Schultz, CFTC Docket No. 20-76 (Sept. 30, 2020).

⁴See United States v. Chow, 993 F.3d 125, 134–39 (2d Cir. 2021) (holding that a nondisclosure agreement creates a duty of trust and confidence sufficient to support liability under the misappropriation theory); Miller Remarks, supra note 1 (noting that confidentiality agreements and NDAs create enforceable duties for CFTC purposes).

⁵See CFTC v. Byrnes, No. 13-cv-1174 (S.D.N.Y. Aug. 3, 2020) (Consent Order for Permanent Injunction, Civil Monetary Penalty and Other Equitable Relief) (finding violations of CEA § 9(e)(1) and CFTC Regulation 1.59(d)(1)(ii) based on disclosures in breach of the exchange’s Code of Conduct and Employee Handbook).

⁶See CFTC v. EOX Holdings LLC, No. 1:18-cv-08890 (S.D.N.Y. Sept. 28, 2018) (complaint for injunctive relief) (alleging misappropriation of material nonpublic information in breach of duties created by exchange rules and customer agreements); CFTC v. EOX Holdings, L.L.C., No. 22-20622 (5th Cir. Jan. 8, 2024).

⁷See CFTC v. EOX Holdings LLC, No. 1:18-cv-08890 (S.D.N.Y. Sept. 28, 2018) (alleging that broker owed duty of trust and confidence to customers arising from customer agreements and industry rules).

⁸7 U.S.C. § 6c(a)(4) (2018) (commonly referred to as the “Eddie Murphy Rule”), enacted by the Food, Conservation, and Energy Act of 2008, Pub. L. No. 110-246, § 13203, 122 Stat. 1651 (2008) (prohibiting government employees from trading on material nonpublic information related to government action).

⁹See United States v. O’Hagan, 521 U.S. 642, 652 (1997) (holding that no formal fiduciary relationship is required; liability attaches whenever a person misappropriates confidential information in breach of a duty owed to the source); Stop Trading on Congressional Knowledge (STOCK) Act of 2012, Pub. L. No. 112-105, 126 Stat. 291; 7 U.S.C. § 6c(a)(4) (Eddie Murphy Rule).

¹⁰See CFTC v. Byrnes, No. 13-cv-1174 (S.D.N.Y. Feb. 19, 2021) (Eibschutz Consent Order) (finding that defendant aided and abetted misappropriation of material nonpublic information by soliciting and receiving confidential trade information from exchange employees); 7 U.S.C. § 13c(a) (imposing liability for aiding and abetting violations of the CEA).

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