ESMA flags prediction markets as ‘rife with inside trading’
The UK Financial Conduct Authority has been engaging international counterparts about online prediction markets, the regulator told the Guardian, after it emerged that Polymarket has been hosting bets on whether major global banks will fail by the end of this year. Bobby Dean, a Liberal Democrat member of the Treasury committee, urged UK authorities to intervene.
Polymarket, the US-owned company which holds bets on anything from football matches, to the existence of aliens, to when a bomb drops on a city, has taken $77,507 (£58,530) in positions on bank failures, according to the Guardian. The bank-failure markets include lenders ranging from JPMorgan to BNP Paribas, as well as two of the largest banks on UK high streets: HSBC and Lloyds Banking Group.
The platform bars residents of the United Kingdom, United States, Canada, and European Union from participating, but allows punters from roughly 150 other countries to monetarily benefit from events that would create “huge financial instability and threaten the health of entire economies,” the Guardian reported.
The FCA told the paper it had been in contact with international regulators about prediction markets as part of efforts to protect “market integrity.” HM Treasury did not respond to requests for comment.
Concerns about insider trading and market manipulation on Polymarket have grown alongside the platform’s reach, with Dean telling the Guardian that UK authorities should act before the bank-related activity escalates.
“Polymarket has a poor reputation for stopping insider trading or bad actors placing bets on their platform, so it’s easy to see how it could be exploited to try to aggravate real shifts in market sentiment,” Dean said. “If the bank-related activity grows on the platform and then a particular market was to escalate rapidly, it could even trigger bank runs.”
Dean urged UK regulators to coordinate with US counterparts. “I would urge our regulators to get in contact with their counterparts in the US to raise concerns. We should not turn a blind eye to the risks because they are relatively small today, we’ve all seen how quickly things can move in this sector,” he said.
Polymarket’s leadership has defended the bank-failure markets, arguing they make information available to a wider audience. Neal Kumar, the company’s chief legal officer, said: “The information in these markets is already public. Banks, hedge funds and credit professionals have had access to credit default swap markets for years. You shouldn’t need to work at an institution like that to have access to information on a topic of this importance like bank failures. Polymarket simplifies the question, providing a much larger audience with information, and markets serve as a powerful source of information and combating disinformation.”
Academics have pushed back, warning that prediction markets create a “serious moral hazard” by giving participants “an incentive to engage in corrupt, illegal, or dangerous actions in order to rig the outcome of the contract.”
The European Securities and Markets Authority, in its twice-yearly risk report published last month, warned that “Market manipulation and insider trading risks reach new levels in the context of prediction markets, particularly on DLT-based [distributed ledger technology] platforms such as Polymarket, which operate with limited identity verification and where the platform itself may not know who is behind a given wager.” The agency added that “a growing number of incidents illustrates that prediction markets are rife with inside trading.”
The Guardian’s report comes against a backdrop of recent cases that have drawn regulatory scrutiny. In February, several newly created wallets reportedly generated $1.2 million in profits shortly before the US-Israeli strike on Iran became public. In January, a US soldier was criminally charged with allegedly using classified information to place profitable bets on the US capture of Venezuelan leader Nicolás Maduro. In April, police were notified over the suspected tampering of weather sensors at the Charles de Gaulle airport that were used to settle Polymarket weather contracts.
The bank-failure bets have drawn particular attention because they could compound the social-media-fuelled bank runs that helped topple Silicon Valley Bank and Credit Suisse in 2023, both collapses that were accelerated by frenzied speculation on platforms such as X and WhatsApp. The Bank of England said its supervisors “engage regularly with companies on a wide range of market developments and emerging risks.” Lloyds and HSBC declined to comment.
While Polymarket is headquartered in the US, its markets are international and its users are anonymous. The platform is built on blockchain, and accounts are linked to crypto wallets that can be publicly traced but are difficult to link back to individuals. Some users from restricted jurisdictions reportedly access the platform through virtual private networks, in violation of Polymarket’s terms of service.