Polymarket and Kalshi Grapple With A New Class of Insider Trader

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1:32Bloomberg Audio Studios. Podcasts. Radio. News. I'm camping outside the Super Bowl stadium with this listening device for the next few days. Because you can bet on how long the national anthem will be. Back in February, the TikToker Caden Booth thought of a way to game the Super Bowl. He wanted to make a wager on the prediction platform Polymarket about how long it would take Charlie Puth to sing the national anthem. He figured out when the rehearsal for the Super Bowls are happening. He figured out when the artists are flying. He was tracking, like, private jets, other jets, and just, like, figuring out all the travel.

2:09That's Danica Tsekova, a cross-asset reporter covering global markets at Bloomberg. He waited 12 hours in total. And in the end, he managed to be outside on a public sidewalk, listening to the rehearsal of the national anthem and timing it with a stopwatching hand. Caden would go on to bet more than$50 ,000 based on this estimate. So I hammered under 117 seconds and waited to the Super Bowl to see if we won. And on game day, he won big, when the anthem came in at 104 seconds long. And the home of the brand.

2:53Caden isn't a casual polymarket trader. He's more like a power user. And his Super Bowl wager became part of a larger conversation about what constitutes a fair trade on the platform. So there were so many posts questioning whether this is insider trading. You know, half of the responses were like, oh, this guy is super smart. He went there. He did his job. Nothing is insider. The other people were like, oh, this is pushing things too far. Polymarket explicitly forbids betting with stolen or confidential information, relying on illegal tips or placing wagers on events where you can influence outcomes.

3:28Caden's bet didn't appear to cross any of those lines. But a Bloomberg Businessweek analysis of polymarket transactions flagged as suspicious by the analytics firm Polycites found that in the first six months of this year, potential insider trades have been on the rise. Especially insider trades with geopolitical implications. We saw that a majority of these trades are concentrated in Iran war and Venezuela geopolitical markets. That's Leonardo Nicoletti. He's on Bloomberg's data visualization team, and he worked on the analysis with Danica. There are tens of millions of dollars in bets on those markets.

4:09And some accounts, usually a very small share of accounts, have made huge profits on those markets. Tanitza says the stakes of using insider knowledge to inform prediction market bets are getting higher than ever. If I can make money on a market that is connected with violence, with attacks, terror and all that, if I have an incentive to do that, that gets pretty dark, right? And now regulators and the platforms themselves are starting to rethink where the lines between questionable and illegal should be drawn. We're used to treating insider trading when it comes to bond stocks. And like, you know, if I'm a Microsoft employee, it's a common sense that I cannot do so much trading on the stock if I have insider information.

4:56So what the rules are not ready for is like binary outcome contracts on pretty much everything in the world. There are so many platforms that are tracking this activity, but users have been getting more sophisticated.

5:14I'm Sarah Holder, and this is The Big Take from Bloomberg News. Today on the show, prediction markets have opened the door to gambling on everything from celebrity wedding details to the timing of military strikes. They've also created a new kind of insider trader, one that U.S. regulators and the platforms themselves are racing to stop.

5:38Leo, Danitza, both of you have been reporting on the wild world of prediction markets, sites like Polymarket and Calci, where people can bet on binary outcomes in the real world. You've specifically been looking at the rise of insider trading on these platforms. So first, how do prediction markets like Calci and Polymarket define insider trading? I think the main thing is non-public information. It's important how you get it, especially if you get it in an illegal way. That breaks even more rules. Even tipping, like if I work at a certain company where I have information, I give it to you. That is also considered illegal.

6:19but it has changed a lot. Tracking suspicious transactions on these platforms can be difficult, in part because it's hard to know who exactly is making these trades. CalSHI is primarily based in the U.S., which means it's regulated by the Commodity Futures Trading Commission. It requires customers to verify their identities to use the site. But Polymarket has a U.S. market and an international exchange, which isn't regulated by the CFTC. That international venue lists contracts that are considered broadly illegal in the States, including on outcomes related to war and terrorism. And it also allows many users to register without an identity check.

7:04Polymarket, on one hand, they use blockchain, which means that everything is transparent. You could see every single trade, every amount of money. But there are no identities associated with each account or trade, right? So that makes it really hard to understand which trade would constitute insider trading or would be reason to investigate further, right? But Leo, you and Danitza worked with a data analytics platform called PolySites that uses its own metrics for identifying potential insider trades on PolyMarket's global exchange. Walk me through that analysis. What PolySites does is that they basically crunch all this data in real time and they use a set of different metrics where they score each trade according to how likely it is to resemble something that would be a classic example of insider trading.

8:07They're using eight different metrics, including how much money the trader is wagering, how recently their account was created, and how close in time the account creation was to the time in which they traded. So if they open an account and then five minutes later, they put a$20 ,000 bet on something very specific, they would score really high on that metric. The idea being like, why else would they be creating this account unless they knew that they could win a lot of money on a specific bet? Or that they had very high conviction on that specific bet so that they created the account specifically to trade on that.

8:49And, you know, the combination of that and then putting a lot of money into it and trading only one or very few related markets, For example, only trading one Iran war market or three markets that are very similar. These are all things that PolySites uses to score each trade on a scale of how likely it is to be potentially insider trading activity. And so what we did is we examined roughly 34 ,000 trades accounting for almost$300 million of money wagered. Basically, we found that trades with characteristics often associated with insider activity have become more prevalent on poly markets starting January of this year.

9:39Leo, what kinds of trades are seeing the most of this kind of activity, according to your analysis? And are there any notable examples we should talk about? The main thing that we've observed is that this kind of activity was largely driven, at least this year, by trading on geopolitical markets and geopolitical events. We saw that a majority of these trades are concentrated in Iran war and Venezuela. Geopolitical markets like things like U.S. strikes Iran by February 28 or Maduro out by, you know, this date, right? What we found is that the daily volume of these, call them flagged trades, really spiked and crested in late February, where the bets in Iran-related markets were highest.

10:32One high-profile case with geopolitical implications involved the U.S. soldier Gannon Ken Van Dyke, who was indicted in April for allegedly using highly sensitive military information to make money on polymarket. Van Dyke has pleaded not guilty to charges of trading on classified information. The case is going to court now, but he profited more than$400 ,000 on the ouster of Vancouver President Nicolas Maduro. So that was kind of a big case of clearly a national security issue, right? If soldiers are trading on prediction market and potentially giving signal about their future strikes and their future military action, that's obviously a massive national security risk.

11:15What did your reporting show about why these are on the rise? Is it just like as these markets grow, there are more opportunities? Is it that there are more opportunities to place bets on these huge geopolitical events? I think it's a combination of both. Like most of those markets didn't exist like a year and a half ago. And, you know, prediction markets weren't really cracking down on this activity as much before. So it kind of created a whole new world of opportunities that wasn't heavily regulated and there was no massive crackdown. And the consequences weren't clear just a year ago. I think it also goes back to how prediction markets were conceived and the initial ideas behind it.

11:57A lot of the big theorists behind prediction market actually say that insider trading is good. Insider trading is a signal. So if the supreme purpose of prediction market is to be a truth machine to tell you the future, then having insider traders in that market is going to help you find the truth. Denise, it's so funny you said that proponents of prediction markets say that these insider trades actually help people find the truth. Say more about that argument. Can you explain it? Yeah, it's really fascinating. So one of the people we have in the story is Robin Hansen, who is kind of one of the big theorists behind it.

12:36Some people call it the godfather of prediction markets. He's spoken to and advised both of the big founders, so Tarek Mansour at Kaushy and then Shane Copeland at Polymarket. So the main argument he has is that insiders are helping markets. If our goal is to find information, if you want to find what is the outcome of certain event, if we actually have knowledgeable participants, that is good for us, right? Right. So his argument is that if you have the insider information, you place a bet that will make the odds more accurate and more reflective of reality. And the fact that there's money on the line just makes the stakes even higher to find the truth, make the right bet.

13:15Of course, yeah. There are whole theories of how you can govern a country, how you can govern a company, how you can govern so many things using prediction market, because they definitely have been considered a good aggregator for information and a good aggregator of wisdom of the crowds. And in that lines of thinking, insider trading could help. OK, but what about the critics? What are the risks of having an uptick in this kind of insider trading on these prediction markets? Well, the risks are countless. I mean, I don't think it's going to be fun for anyone playing in any market that there are people with knowledge that probably are making prices hard for you.

13:49Like, I don't think it's fun for a trader. I think traders will try to stay away. It's unfair or it feels unfair. Yeah, it feels unfair. And they try to stay away from this. Then the bigger questions are, there are a lot of markets. So the two main thing is manipulation. I shouldn't have incentives to manipulate this. And then obviously national security. I think that's been the massive thing. If like U.S. soldiers or any country soldiers are going to prediction market and figuring out and giving signal about their future military plans, it can get pretty dark. After the break, Calci and Polymarket are trying to tamp down on potential insider trading, even as users get more sophisticated.

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16:52If you're looking for an example of an eyebrow-raising prediction market wager, you don't have to go back very far. Just last week, ABC News reported that a teleprompter operator for President Trump had made over$100 ,000 by betting on more than a dozen presidential speeches on Calci. Calci flagged the suspicious activity to the Commodity Futures Trading Commission, ABC reported. At a press conference, White House Press Secretary Caroline Levitt responded to questions about the alleged issue. I'm aware of the report. The president is too. I spoke with him about it. He believes it's deeply unfortunate and frankly a disgrace.

17:30And the individual that was cited in that report is complying with the CFTC. Levitt said that the teleprompter operator had been put on unpaid administrative leave. If the allegations are proven, a case like this could be a pretty clear-cut example of someone with insider knowledge profiting off their access. But Bloomberg's Danitsa Tsekova says it's also an example of how prediction markets say they're addressing suspicious trades on their platforms by reporting cases to the CFTC or the Department of Justice. In this case, Calci did report the suspicious activity to federal regulators. Can Can you talk more about how Polymarket and Calci's approach has differed when it comes to dealing with suspicious trades on their platforms?

18:16How did they respond to your reporting? Yeah, I mean, their reaction was that they're doing their best and that they're referring as many cases as possible, which in their defense, they are. Like, Polymarket's direct response to this was that they have referred 100 cases to law enforcement. And Kaoshi is also, they've had some interesting measures to stop that. For example, they've banned a lot of athletes betting on sports. They ask for employment information in certain markets. On Kaoshi, we've seen a lot of activity from Politico members and candidates, and they have banned finesome. Kaoshi has said that it now screens to prevent politicians from wagering on their own campaigns and athletes from making bets related to their sports, and that it's even collecting employment data from users in some markets to prevent insider trading.

19:10In March, Polymarket updated its rules to prohibit trading based on stolen confidential information and illegal tips, as well as wagers by those in a position to influence outcomes. And how are federal regulators approaching this problem? There is a kind of a regulatory fight in the background between the CFTC and different states about who regulates prediction markets in the first place. I guess the agreement is that currently it's the CFTC. So the CFTC has taken a stance mostly critical of polymarket and their kind of international markets, their global exchange and them handling so much of the contracts.

19:49But at the same time, what we're seeing from the polymarket exchange in the U.S. is very different. They don't offer most of those contracts that have issues. And also they have a lot more stronger requirements. So they haven't been able to do too much with those markets. Polymarket's U.S. market allows sports and entertainment betting and not much else. But on Polymarket's international exchange, which is illegal to access in the U.S., users can bet on virtually anything. The international exchange is not regulated by the CFTC. So technically, U.S. people should not be trading on the international exchange.

20:30Bloomberg's Leonardo Nicoletti again. If you try to sign up for polymarket.com within the U.S., you'll get a message that says that you're not allowed to do that. But another big challenge for U.S. regulators looking to crack down on illicit trades is that traders within the U.S. can't find ways to illegally access Polymarket International. While it's impossible to identify who is trading on the platform or from where, Leonardo's analysis looked at how many trades were funded through crypto exchanges that are regulated in the U.S., like Coinbase. He found that since January 2021, about$21 billion worth of trades on Polymarket International were funded through these U.S.-regulated crypto exchanges.

21:17That's roughly half of all the traceable trading volume on the platform. And the interesting part is that when you look at geopolitical markets, especially, for example, the Iran war markets, this percentage goes up to 70 percent. And then we took our PolySite's flagged trade data and we found a very similar pattern. Basically, flagged trades related to the Iran war markets since last July are almost three times more likely to have been funded through U.S.-regulated cryptocurrency exchanges than through other sources. In response to Businessweek's reporting, a Polymarket spokesperson pointed to the global platform's ban on users in restricted jurisdictions.

22:06The spokesperson also said, quote, Polymarket surveils and monitors for insider trading and other illegal activity, unquote, and said that the blockchain helps both the public and the platform track suspicious trades. This all leads me to my last question, which is just like, how hard is it for prediction markets to actually enforce these rules? And what challenges are they going to face as they try to crack down on insider trading moving forward? I think it's really hard. Like even some of the rules they have already implemented, like, for example, tracking political candidates, even for that, there are already some issues.

22:44Because like all the databases of like who's involved in a political campaign doesn't necessarily reflect all the people that are involved in their gaps. A lot of the insider trading we see is not directly done by the person who has the insider information because obviously that's very risky. But that information can be passed on. And then the more people get that information and it's passed on, it just becomes very, very hard to investigate. It becomes even harder to bring a lawsuit and it just brings a whole level of complication. So I can see how there will be more regulation to this. And I can also see how those platforms get more sophisticated with tracking those, with stopping those.

23:26And yeah, I feel that will be the future. But I also feel that at the same time, traders on the other side will also get more sophisticated. So it's a constant game of catching up. Yeah, cat and mouse. It never stops.

23:42This is The Big Take from Bloomberg News. I'm Sarah Holder. To get more from The Big Take and unlimited access to all of Bloomberg.com, subscribe today at Bloomberg.com slash podcast offer. If you like this episode, make sure to subscribe and review The Big Take wherever you listen to podcasts. It helps people find the show. Thanks for listening. We'll be back tomorrow.

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