US prosecutors scrutinize prediction markets as volumes rise and banks use them to gauge risk

Law enforcement scrutiny of trading in prediction markets is becoming more likely as these platforms have evolved from niche apps for sports fans into high-profile venues used by sophisticated traders to gauge risks across global events, according to financial reporting.

Growth in prediction market trading

Prediction market volume is rising rapidly, with monthly trading volume now reported at $20 billion, up from $1.2 billion in 2025. While much of the activity remains tied to sports outcomes—such as March Madness advancement and Super Bowl winners—an increasing share of trading is linked to Wall Street and major financial developments.

How the markets operate

Market participants and major market makers are involved in matching trades in a manner described as similar to futures-contract trading. The platforms are also increasingly used by major banks as an indicator of how so-called “smart money” is positioning around outcomes of major events, including Federal Reserve interest-rate decisions and the results of high-profile takeover activity.

Research reports are also increasingly referencing prediction markets in the same way they might reference commodities such as gold or oil.

Regulatory focus and potential fraud risks

With growth comes heightened risk of fraud. Federal prosecutors in Manhattan have been scrutinizing well-timed bets on prediction markets that have drawn headlines, including whether such activity may have violated insider-trading laws.

Officials at the U.S. Attorney’s Office for the Southern District of New York (SDNY), led by former Securities and Exchange Commission Chairman Jay Clayton, reportedly met with representatives from Polymarket regarding lucrative wagers tied to surprise events such as the capture of Nicolas Maduro and missile strikes on Iran.

“The action in the prediction markets, like the action in any markets, is stuff that will be looked at,” a source with knowledge of the matter told The Post.

Industry perspective

Veteran hedge fund trader Scott Matagrano said the expansion of the market meant regulators had to pay closer attention. He argued that the SDNY would need to engage because the market’s scale makes oversight difficult to justify as minimal.

“Clayton had no choice but to begin kicking the tires in the prediction markets.”

“SDNY presumably had to engage here because you can’t have a multi-billion-dollar market operating with little oversight structure,” he added.

Responses from prediction market operators

A Polymarket spokesperson said the platform maintains market integrity standards and works with regulators and law enforcement.

“Polymarket sets, maintains and enforces the highest standards of market integrity. We also proactively work with regulators and law enforcement to enforce those standards.”

Kalshi’s spokesperson referred to comments by the company’s Head of Enforcement, Robert DeNault, stating that insider trading and market manipulation violate Kalshi’s rules and that the company collaborates with law enforcement on investigations.

“Kalshi has been and will continue to collaborate with law enforcement on investigations to ensure the integrity of regulated prediction markets,” he wrote on X.

No companies have been accused of wrongdoing in the reporting.