Government AI tracks insider trading as bots take over prediction markets

Prediction markets processed more than $44 billion in wagers last year, but regulators say many of the top-performing participants are now automated trading bots rather than humans.

On Polymarket, automated bots now run more than 30% of active accounts. Data from the platform’s top earners shows that 14 of the top 20 accounts are controlled by bots.

More than 37% of these automated accounts consistently.

Lawmakers target insider trading risks

Polymarket trading activity fell 8.9% in April for the first time since August, as competitors gained market share.

According to Dune Analytics, the platform and its US operation registered $10.2 billion in bets in April, a decrease from $11.2 billion the previous month.

Meanwhile, rival platform Kalshi saw volume jump 13% to reach $14.8 billion in April.

The decrease occurred as Polymarket tried to rebuild its US footprint while under increased scrutiny from politicians concerned about insider trading.

Senator Elizabeth Warren wrote to the Commodity Futures Trading Commission in March, along with more than 40 other members of Congress.

They wanted laws that would ban government officials from profiting from secret material on these platforms.

“The CFTC maintains that event contracts are a type of swap subject to its jurisdiction, and, therefore, it should ensure that federal employees understand existing restrictions on prediction market insider trading,” the lawmakers said.

Several Polymarket users have drawn suspicion for placing winning bets on sensitive world events, including military actions in Venezuela and potential conflict with Iran.

One case led to the first criminal charges for insider trading on a prediction market in the United States.

A U.S. Army Special Forces soldier was arrested for allegedly using classified intelligence to bet on the arrest of Venezuelan leader Maduro.

Regulators use AI tools to monitor trades

Regulators say they are fighting back with the same technology that has allowed bots to dominate markets.

CFTC Chairman Michael Selig told reporters that the agency utilizes AI tools to examine trade patterns, detect anomalous conduct, and collaborates with blockchain tracking businesses like Chainalysis to monitor offshore platforms such as Polymarket.

According to an AIMPACT update dated May 15, the CFTC uses AI to scan vast volumes of trading data, assisting staff in identifying suspect accounts and deciding whether to initiate investigations or issue subpoenas.

According to Selig, AI has become crucial as data volumes increase rapidly.

The business is combining blockchain analytics tools with market anomaly detection technologies to monitor both cryptocurrency and traditional financial markets.

The CFTC has received many allegations of odd trading and is actively looking into “hundreds to thousands” of potential cases. Future enforcement efforts are likely to broaden.

Selig stated that the agency will take action against U.S. users who attempt to mask their location by utilizing VPNs to access prohibited services.

That enforcement applies to worldwide marketplaces.

Even while platforms like Polymarket operate outside of the United States and lack U.S. licenses, the CFTC said it will seek enforcement against cross-border trades involving Americans and may utilize extraterritorial authority if necessary.

Platforms are reacting to the demand.

Polymarket and Kalshi have improved their checks for insider trading and market manipulation, bringing in external blockchain data providers to meet regulatory requirements.

The CFTC offered prediction market platforms some regulatory relief on Wednesday, issuing a no-action letter that exempts them from certain swap reporting requirements.

The exemption applies to exchanges and clearinghouses that handle event contracts.

Agency staff said they would not pursue enforcement against platforms that skip those reporting rules, following requests from companies seeking clarity on how event contracts should be regulated.

Although event contracts are officially classed as swaps since they have yes-or-no outcomes, the CFTC believes they work more like futures and options due to their uniform terms and exchange trading.

According to the new guidance, firms can report these transactions directly to the Commission in a manner similar to futures and options markets.

The relief now applies to 19 firms, including Polymarket US, Kalshi, Gemini Titan, and Bitnomial. Other companies listing event contracts may request coverage on the same terms.

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