Polymarket is moving to quash insider trading as prediction markets face scrutiny over whether some users draw on classified or other closely held information to gain an edge in betting on events. 

The New York-based company said Monday that it has updated its rules to prohibit trades based on “stolen confidential information” or illegal tips. Polymarket also clarified that traders cannot place a bet if they “hold a position of authority or influence” that may influence the outcome of a certain event. 

For example, CEOs of a public company would not be allowed to trade on a market focused on how many times they will use a certain word during an earnings call with Wall Street analysts. Polymarket’s rules, which are now posted on a “market integrity” page on its website, apply to the company’s U.S. exchange and offshore operations.

“Concern around trading”

Companies like Polymarket and rival Kalshi let users wager money on the outcome of elections, sports contests and many other events. Yet while their popularity has exploded, the companies are attracting attention from lawmakers and other critics who say they violate anti-gambling regulations and who raise concerns about the integrity of trading activity on the platforms. 

“There had been a lot of concern around trading on the U.S. market from outside the U.S. borders and vice versa,” said Stephen Piepgrass, a partner at Troutman Pepper Locke who leads the law firm’s regulatory practice, regarding Polymarket’s updated insider trading rules. “So I do think part of this is about trying to create an approach that applies everywhere.”

Polymarket said it uses a “multi-layered monitoring system” and partners with surveillance and technology specialists to determine if users are violating its terms of use. The prediction platform outlined several steps it could take if it detects questionable trading activity, including referring the matter to law enforcement and taking other disciplinary actions.

“Markets thrive on clarity,” Neal Kumar, chief legal officer of Polymarket, said in a statement. “These rule enhancements make our expectations abundantly clear for every participant across both platforms and highlight the compliance infrastructure we have already built.”

But Ben Schiffrin, director of securities policy at Better Markets, a nonprofit advocacy group that supports financial reform, questioned whether Polymarket’s revised policies will prove effective. 

“Insider trading regulation does not work if it is left to the platforms to police themselves,” he told CBS News in an email. 

Staying ahead of regulators

Polymarket has raised eyebrows in recent months after some of its customers placed suspiciously well-timed bets on the capture of former Venezuelan President Nicolás Maduro and the outbreak of war in Iran. One user appeared to make hundreds of thousands of dollars on wagers related to the timing of U.S. strikes on Iran. 

“I don’t think there is any question that Polymarket is responding to the scrutiny it has received after insiders appeared to profit off of their ability to bet on whether there would be a war with Iran,” Schiffrin told CBS News.

Piepgrass said Polymarket and Kalshi are likely trying to firm up their own rules against insider trading to preempt any move by Congress to impose restrictions. 

“I think the concern is, if these market platforms don’t implement their own regimes, then someone’s going to do that for them,” he told CBS News.

The Commodity Futures Trading Commission, which regulates prediction markets, earlier this month issued guidance on what measures prediction markets should take to prevent insider trading. 

As part of a proposed rulemaking process, the agency also encouraged exchanges to engage with its staff when designing event contracts to identify potential “manipulation or price distortion risks.”

“In some ways, this may be an effort to get in front of that process,” Piepgrass said.

Beyond concerns about insider trading, Kalshi and Polymarket have also drawn criticism for hosting sports-related bets on their platforms, which some argue constitute illegal gambling. On Tuesday, Democratic Senator Adam Schiff of California and Republican Senator John Curtis of Utah introduced legislation to ban trades on prediction markets that resemble a “sports bet or casino-style game.”

Kalshi updates its own rules

Kalshi on Monday also announced that the company is enhancing its ability to detect insider trading and tightening its policies against market manipulation. 

“We’re launching new technological guardrails that preemptively block politicians, athletes and other relevant people from trading in certain politics and sports markets,” the prediction market said in a statement. 

Kalshi also said it is adding a whistleblower feature in its platform that lets users flag potential violations of its rules.