Kalshi CEO tackles ‘philosophical’ difficulty of cracking down on insider trading

When is insider trading on prediction markets actually insider trading?

That’s the question Kalshi CEO, Tarek Mansour, found himself answering on national television Tuesday afternoon.

The prediction market recorded one of its highest-ever trading days on Sunday during the Super Bowl. Alongside wagers on who would win the NFL championship, Kalshi users could also place bets on other seemingly innocuous markets.

That included a $113 million market for what Puerto Rican pop star Bad Bunny would play as the opening song for this year’s halftime show.

“It’s a fun philosophical but maybe practical question,” Andrew Sorkin, the host of CNBC’s Squawk Box, asked Mansour.

“Let’s say you’re a dancer for Bad Bunny, and you knew what the situation was when you made a bet. It sounds like that would be considered insider trading, right?”

Whether insider trading, a form of fraudulent activity that is prohibited by law in financial markets, has occurred depends on whether the trader has used material nonpublic information to profit from their investment.

This information would likely affect a company’s stock price and is not yet public.

Material nonpublic information would include details of an upcoming earnings report or a splashy merger that employees of a Fortune 500 company would see.

Making investments or trades using this information would likely be considered insider trading. Executives are usually aware of these scenarios and take measures to prevent employees from profiting from them.

But Bad Bunny isn’t a Fortune 500 executive, and the song lineup at a Super Bowl halftime show certainly isn’t the same event as an earnings report.

Does that mean the manager, dancers, or cameramen can share which song will be played first?

“If that’s the position that people are taking, which is essentially, ‘this is nonmaterial, nonpublic information,’” Mansour said, “and that it’s ok to talk about which song is going to be played, it’s ok to divulge certain information beforehand, then it’s totally fair game.”

Philosophical indeed.

Prediction market ‘supercycle’

As prediction markets continue to grow, it will become ever more important to draw a line in the sand.

Prediction markets, such as Kalshi and its nearest competitor, Polymarket, let users bet on the outcomes of a wide variety of real-world events.

Many are related to financial markets, including wagers on whether the Federal Reserve will raise interest rates at its next meeting. Other markets are far more obscure. On Polymarket, for instance, there’s roughly $2.2 million being traded on whether Jesus Christ returns before 2027.

Since February 2, these platforms have cumulatively traded more than $6 billion in weekly volume, according to data collected by datadashboards.

However, sports wagering dominates user interest across these platforms.

Sports betting volume makes up 40% of Polymarket’s weekly volume. On Kalshi, that same figure is closer to 78%.

The action has also attracted fintech companies, such as Robinhood, as well as traditional sportsbooks, like DraftKings and FanDuel.

“We’re just at the beginning of a prediction market supercycle that could drive trillions in annual volume over time,“ Vlad Tenev, the CEO of Robinhood, said during the company’s earnings call on Tuesday.

Meanwhile, state authorities are taking aim at many prediction platforms for operating as unlicensed sports betting platforms.

And questions about what qualifies as insider trading when everything is a market are becoming increasingly difficult to answer.

“What prediction markets will do, however, is push the law to its limits and test whether it bends or breaks,“ wrote Daniel Barabander, a partner and chief legal officer of the venture firm Variant Fund, on February 6.

“By widening the aperture to make almost anything tradable, prediction markets expand the sources of valuable inside information — into contexts where the existence of any relevant promise is far less clear.”

Kalshi steps up surveillance

To be sure, Kalshi is working to prevent insider trading on its platform.

Mansour explained that his company uses the same enforcement mechanism as traditional financial markets, including a surveillance and investigation team to monitor any unusual behaviour on the platform.

On February 5, Kalshi launched an independent audit committee to help protect its markets from insider trading.

“We have an investigation staff that checks who is behind the trade and what they were doing, and if they were doing something wrong, such as insider trading, the punishment goes from fines to referral to the CFTC for criminal prosecution,” he said.

So far, Kalshi has identified at least one case of potential insider trading in Tennessee.

In October, a University of Tennessee student was fired from the college’s in-house broadcast team for placing wagers on NFL, NBA, and college football games using Kalshi.

The National Collegiate Athletic Association prohibits athletics-related employees from gambling on sporting events.

Liam Kelly is DL News’ Berlin-based DeFi correspondent. Have a tip? Get in touch at liam@dlnews.com.