Prediction markets spark insider trading fears. How firms are responding

Insider trading is an emerging risk in the new world of prediction markets, and some companies – including Goldman Sachs – are taking steps to limit employees’ trades on the platforms.

Goldman Sachs has banned its employees from trading on contracts related to events that are specific to the bank, as well as elections, financial markets, macroeconomic data and geopolitics, according to people familiar with the matter.

A representative for Goldman declined to comment on the policy, but did state that the bank prohibits using material, nonpublic information to trade across all markets.

While some firms have started developing policies to managing insider trading risks on prediction markets, many others have yet to take those first steps, legal experts say.

“We are getting constant questions from clients, particularly among regulated entity clients, about what the regulator expectations are, what the risks are, where the areas of potential liability are,” said David Oliwenstein, a partner and securities enforcement practice lead at Pillsbury.

The news of an explicit prediction market trading directive at Goldman comes after the first event contract insider-trading case to involve a private sector company. 

In May, the Commodity Futures Trading Commission and Department of Justice charged Google employee Michele Spagnuolo with using material, nonpublic information to trade on Polymarket contracts related to the browser’s “Year in Search” lists. Using the handle “AlphaRaccoon,” Spagnuolo allegedly collected about $1.2 million in profit, according to the CFTC’s complaint.

Legal experts said the sheer number of contracts available on prediction platforms may provide new avenues for material, nonpublic information to be used to turn a profit. For example, a Google employee could use internal data to trade on contracts about what the company’s headcount will be this year, when it may release a new version of its Gemini AI tool or where Alphabet’s share price will end the month. 

“All these different questions that you’re able to bet on… it makes it really hard to kind of play whack-a-mole in terms of where people are using the information they’ve obtained confidentially,” said Karen Woody, law professor at Washington and Lee University. 

Lawyers told CNBC that as more insider trading on these platforms is caught and prosecuted,…