Matt Levine has a good take on this. His informal, distilled definition is essentially:
- There is a time gap where insiders know something material and the public does not.
- Someone with access to that material nonpublic information, who is not supposed to use it for personal gain, trades on it anyway.
- That conduct is treated by courts as a deceptive scheme against the less‑informed trading counterparty and against the information’s rightful “owner.”
In other words - you profit at another person's expense (e.g. stealing) because you have information and the other person doesn't.
Two scenarios:
(1) a US Naval Officer knows about a strike 24 hours before it happens and places a bet against someone who doesn't have knowledge about the strike.
(2) Neither a US Naval Officer knows about a strike 24 hours before it happens and someone who doesn't have knowledge about the strike do nothing.
Scenario 1 is (or should be) illegal because the officer is using the information for personal gain, when the information was explicitly given to them for national defense reasons (thus violating the rightful owner clause).
(it's true that low level insiders might have limited influence on the actual outcome, but the current suspicion with prediction markets is that some of the participants do have that influence, or are being intentionally helped by people that can)
It's a bit like playing poker...does the guy who just went all in have pocket Aces or not?
So now who are the non-expert outsiders and why would they bet? Outsiders who think they are experts but are wrong.
If you're asking about why prediction markets fall under the CFTC, this is actively evolving but generally prediction markets are considered to be under the CFTC because they can be used to hedge against events.
For example if you're trying to do business in Oman but you're worried about Iran tensions spilling over, you could take a Yes position on an Iran conflict bet as a hedge. You may lose business but can make some of it up in the hedge.
"Gambling" the concept legally is very complicated and has a lot to be understood, so I'd suggest doing some searching or LLM asking if you want an intro on philosophical definitions or the legal landscape.
There's a body of legislation and legal precedent that actually defines gambling and how that's distinct from markets.
No. Their defense is that they are a gamified platform for futures contracts and hence should fall under CFTC regulation.
The CFTC also cracks down on insider trading, but it took time for them to write regulations to catch up with prediction markets.
It is now a priority [0] and they have just started a paid whistleblower [1] programs specifically to catch insider traders within prediction markets.
[0] - https://www.lw.com/en/insights/new-cftc-enforcement-director...
[1] - https://www.whistleblower.gov/whistleblower-alerts/Insider_T...
I find prediction markets to be interesting on two fronts:
1) They like a really good way to determine the probability of something happening, which is interesting for events like elections
2) It provides an avenue for smart bettors to take advantage and sharpen their skill, whereas they get severely limited or banned from traditional sports books
However, it seems like all incentive structures for the markets and consumer behavior will steer these things to degenerate gambling.
N.B. it becomes a bit frustrating to talk about financial and regulatory things on this site because the level of knowledge is generally "I read some articles on social media about markets" level.
Additionally, the SEC and CFTC guidance on what digital asset can be treated as a security and what can be treated as a commodity was only released a couple weeks ago [0].
Stuff is changing rapidly so it's best to keep an experienced regulatory lawyer on retainer.
> N.B. it becomes a bit frustrating to talk about financial and regulatory things on this site because the level of knowledge is generally "I read some articles on social media about markets" level.
Yep. It is what it is.
[0] - https://www.morganlewis.com/pubs/2026/03/crypto-clarity-sec-...
That might be the defense. They are inherently designed to leverage insider trading though. I made a top level comment with links/resources that argues why.
But sometimes the answer is more difficult than it seems. Is a mid level military officer an insider? If you overheard a conversation on Capitol Hill are you an insider?
Second, the majority of prediction markets are predicting utterly mundane things like sports. The tiny number of news grabbing markets are not representative.