Insider Trading Prohibitions

Insider trading occurs when a person trades on the platform while in possession of certain information or influence over the outcome of a contract that materially affects their decision to trade. Federal law, CFTC regulations, and Kalshi's CFTC-approved exchange rules prohibit insider trading – and engaging in it can lead to suspension from the platform, investigations, penalties, and criminal prosecution.

Insider trading is really just a form of fraud. Whenever a person tries to obtain money from another person while deceiving or misleading them, or omitting crucial information, it is generally considered fraud. From a common sense perspective, insider trading involves trying to obtain money from another person while misleading them into thinking you are both on an equal playing field of access to information, when in reality, you have an unfair upper hand.

But legally, insider trading can be a bit more complicated. Insider trading usually applies where a person has information due to their employment or an official "fiduciary" relationship (i.e., a relationship in which you legally owe a duty to the other party). When you are differently situated than every other player in the market because of a legally defined relationship (employee, representative, agent, lawyer, etc) you are typically considered an insider who should be prohibited from trading on misappropriated inside information.

The question of whether insider trading applies to prediction markets is a relatively simple one: does trading on material non-public information in prediction markets expose you to insider trading or fraud liability? And the answer is clear: yes, it does. But such liability turns on the circumstances and facts determined on a case-by-case basis.

The CFTC has brought enforcement actions against individuals who engage in insider trading on CFTC-regulated exchanges, like Kalshi. Specifically, trading for personal gain while in possession of material non-public information obtained during the course of an employment relationship may constitute a violation of 7 U.S.C. Section 6(c)(1) and CFTC Regulation 180.1(a)(1) and (3). Courts have recognized that these provisions mirror the insider trading rules under the Securities Exchange Act, which define our traditional understanding of insider trading. Some CFTC insider trading cases have also involved "tipping", a scenario where an insider misappropriates confidential information and shares it with others so that they could trade on the information, and share the benefits with the tipper. To determine whether a person had a legal duty to the party from which the obtained the non-public information, courts typically look to law, regulation, agreements, understandings, or other sources that explain the relationship between the parties.

Separately, Section 4c(a)(4)(A), (B) of the Commodity Exchange Act specifically prohibits employees or agents of the federal government from disclosing confidential, non-public information that may affect the price of a commodity for personal gain, and the recipients of such information from using it for trading purposes. The statute further prohibits misappropriation of government information that may affect the price of a commodity where a person knows, or acts in reckless disregard of the fact, that the information has not been disseminated by the relevant government agency, and uses or shares the information for trading purposes. This is often referred to as the "Eddie Murphy" rule, drawn from the popular movie Trading Places where a similar scheme took place. This statute has rarely been enforced, but the CFTC has the authority to use it for civil or criminal enforcement.

These federal laws and regulations apply to trading on Kalshi – just because prediction markets are new does not mean that the law does not apply to insider trading or fraudulent conduct on a licensed exchange. But the government is not the only force surveilling prediction markets for unlawful trading activity. Kalshi goes further than any other prediction market in prohibiting other types of insider, fraudulent or manipulative trading on its exchange.

Kalshi's exchange rules are approved and certified by the CFTC. They define numerous types of prohibited trading activity, along with other requirements that apply to all members of the exchange. Specifically, Kalshi's rulebook defines insider trading as trading by:

• Any person who has access or is in a position to access material non-public information before such information is made publicly available
• Any person who is an employee or affiliate of a source agency for any contract
• Any person who is a decision maker, direct or indirect, or has any influence, direct or indirect, on the outcome of the underlying event for any contract

Kalshi's exchange rules also prohibit any trading activity that is fraudulent, abusive, manipulative, or deceptive; prohibit traders from making any material misstatements or omissions in connection with trading; and prohibit engaging in any practice which operates as a fraud or deceit upon another person.

At onboarding, Kalshi collects detailed information from each member applying to trade on the exchange. Kalshi screens a number of people – including certain politicians, government officials, athletes, and individuals associated with sports markets – from the moment of onboarding and either prevents them from accessing the platform, or subjects them to special trading restrictions on the platform. More information on that can be found on our Screening page.

For individuals who are permitted to trade on Kalshi, all their trading activity is monitored by both Kalshi's internal surveillance systems as well as external third party vendors who specialize in trading surveillance and investigations. Our surveillance team monitors and investigates suspicious transactions on the platform. Once a transaction has been flagged as potential insider trading, the user's account if frozen and they are unable to withdraw funds until an investigation is completed. Kalshi Compliance collects evidence related to the flagged trades, including trading patterns, transaction histories, user information, and other information obtained through open source investigations and partnerships with vendors. Kalshi Compliance typically conducts an interview with this user after gathering initial evidence and determines whether there is reasonable cause to believe rules may have been violated. If there is, the user's account remains frozen and a disciplinary process outlined by Kalshi's Rulebook begins.

Kalshi disciplinary proceedings may result in findings regarding user misconduct, settlements, notices of charges, disciplinary hearings, and, ultimately, disciplinary action. Penalties may include fines, disgorgement of profits, and permanent suspension from the exchange. In any case where the Compliance and Legal Departments suspect unlawful conduct occurred, cases are referred to law enforcement for further investigation.