ESMA's latest report raises concerns about insider trading in prediction markets, highlighting regulatory challenges and significant profits by a small number of traders.
ESMA Highlights Insider Trading Risks
The European Securities and Markets Authority (ESMA) has expressed serious concerns about insider trading and market manipulation within prediction markets, as detailed in its latest risk monitor report. This report dedicates an entire chapter to the issues plaguing this sector.
ESMA identified multiple instances of insider trading, including a case where new wallets allegedly profited $1.2 million shortly before a military strike on Iran. In a separate analysis, nine accounts linked to Iran-related bets reportedly earned $2.4 million with a 98% success rate. Additionally, a U.S. Army master sergeant is facing charges for making over $400,000 from bets on Polymarket regarding the capture of Venezuelan president Nicolás Maduro. Furthermore, concerns about sensor tampering in weather contracts prompted Météo-France to file a police complaint.
The regulator noted that responses from prediction market platforms to these incidents are typically reactive, often occurring only after illicit profits have been realized. Responding to the Maduro betting case, Polymarket's chief legal officer, Neal Kumar, highlighted the false sense of anonymity in these markets, stating, "It's not anonymous—you will be found just like this guy."
Regulatory Challenges in Europe
ESMA's report suggests that the lack of popularity for prediction markets in Europe stems more from regulatory barriers than a lack of interest. Event contracts may be classified under various regulations, including MiFID II, MiCA, or even as gambling under national laws, complicating their status. When classified as financial instruments, they are treated as derivatives, which are prohibited from being sold to retail investors.
Platforms like Kalshi and Polymarket have implemented restrictions on users from certain EU countries, but the enforcement of these restrictions is inconsistent. While both platforms block VPN access, the effectiveness of these measures remains unclear. Currently, Malta is the only EU country actively drafting regulations tailored to prediction markets.
Despite these regulatory hurdles, prediction market volumes have seen significant growth. The report shows that by November 2025 for Kalshi and January 2026 for Polymarket, quarterly volumes reached $8.8 billion and $12 billion, respectively. A report from June indicated a combined monthly volume of $44.8 billion, with Kalshi accounting for $31.5 billion during the World Cup betting surge. Notably, sports betting made up 73% of Kalshi's volume, while Polymarket's volume was spread across politics, sports, and cryptocurrency.
Additionally, ESMA referenced a report from the Wall Street Journal that revealed 67% of Polymarket's profits are accrued by just 0.1% of the accounts, alongside a Bloomberg analysis indicating that many traders in these markets actually incur losses.
