Back in the 2000s, one of the most notorious insider trading scandals centred on a pharmaceutical chief executive who dumped his company’s shares after learning that the US Food and Drug Administration had rejected its main cancer drug. People around ImClone’s Sam Waksal, including his daughter and father (who were not charged with any criminal offence), also sold stock. Lifestyle guru Martha Stewart was drawn in after their shared broker tipped her off to the trading.
When the failed application became public, ImClone’s shares plummeted, Waksal went to prison, and Stewart did too after lying to a government probe.
That history makes me worry about Kalshi’s announcement last week that it plans to accept bets on FDA approvals and clinical trial results. The prediction market says would-be participants will have to disclose their employers and that people who work at drugmakers or have access to unblinded data will be barred from participating. It also will not start the betting until after trial enrolment has already closed.
Kalshi contends that such “events contracts” will keep competitors and the public better informed about a vital industry and be of interest to traders who want to bet on specific drug milestones, rather than take a view on an entire drugmaker’s share price. It also argues its surveillance systems are sophisticated enough to prevent insiders from abusing their access.
“Even though the surface area is broader, events contracts are distilled into a single question and what is material is pretty narrow, so that allows us to zero in on, OK who would know this? It’s a small group of individuals,” says the company’s enforcement director Robert DeNault.
That theory extends well beyond pharma. DeNault revealed last week that Kalshi had frozen the account of Donald Trump’s longtime teleprompter operator for allegedly using insider knowledge of the president’s speeches to bet on their contents.
Kalshi’s policing efforts stand in sharp contrast to the general vibe in Washington. Some members of Congress regularly trade stocks affected by their actions, and a trio of anonymous accounts at Kalshi’s offshore rival Polymarket not only placed timely wagers on the first Iran attack but also made $600,000 on the April ceasefire.
Last week, the Trumps, who have raked in $2.2bn since returning to the White House, unveiled another moneymaking venture that surprised even hardened Wall Street financiers.
Trump Media & Technology Group, the family-controlled social media group, has discussed charging traders $100,000 a month for faster access to the president’s posts on Truth Social. While this may sound a lot like the high-speed feeds that the hedge fund traders paid for in Michael Lewis’s Flash Boys, Trump’s involvement takes the privileged access up a notch — or three.
Not only is TMTG attempting to profit from a government official’s news-making pronouncements, but it is doing so with a pitch sheet that touts previous Trump posts that moved stock and oil markets and inherently promises that he will continue to do so.
Even companies that doubt the trading value of the feed may feel pressure to sign up lest they lose a leg up on their competitors in a White House that prizes fealty.
At the same time, this Trump administration has done relatively little to crack down on market misbehaviour. Enforcement at the Commodity Futures Trading Commission, where Kalshi refers its cases of suspicious trading, fell off a cliff last year from 58 cases in the last full fiscal year of the Biden administration to 13 in FY 2025.
Meanwhile, the Securities and Exchange Commission saw insider trading and market manipulation cases drop from 54 to 48 as total enforcement actions fell 22 per cent to 456.
The men atop the two watchdogs insist they will continue to provide “vigorous oversight” and “meaningful investor protection”. But the only two people who have been prosecuted for prediction markets abuses so far are a low-ranking soldier who allegedly misused classified information about the January military operation in Venezuela and a Google engineer who allegedly bet on search engine trends. Both men are fighting the charges. Trump’s teleprompter operator has not been charged with wrongdoing.
Market providers can only do so much with advanced detection techniques and bettor screening. Without the threat of government prosecution, unscrupulous people will keep trying to profit from inside knowledge. The ever-increasing reach of prediction markets all but ensures that more and more of them will find ways to do so.