Arizona Tightens Prediction Markets Regulations To Prevent Insider Trading

Arizona Governor Katie Hobbs has signed an executive order banning government employees from using confidential information to trade on prediction markets or sharing non-public information with relatives, friends, business associates or third parties for financial gain.

The order follows the expansion of prediction markets across the United States to improve ethics standards within Arizona’s executive branch. Furthermore, Governor Hobbs encouraged the state’s legislative and judicial branches, plus independently elected officials, to adopt similar measures.

This directive targets situations where government employees could benefit from privileged information before it becomes public. It centres on how public officials should handle sensitive information obtained through their work.

Officials seek to preserve trust as prediction markets expand

Prediction markets rely on publicly available information to function. Once someone has access to confidential government information,  the equation changes. 

A government employee with advance knowledge of an executive decision, regulatory announcement or economic policy can trade with an advantage unavailable to ordinary market participants. Instead of predicting an outcome, they already know information capable of influencing market prices.

The risks become even higher when sensitive government actions are involved. Early knowledge of disaster declarations, military developments or major policy changes could create opportunities for huge financial gains before the public becomes aware.

Governor Hobbs argues that public service carries responsibilities beyond simply following the law. Even if event-based trading does not fall within traditional definitions of insider trading, using privileged government information for personal financial benefit creates an obvious conflict of interest.

The executive order removes uncertainty by making it clear that confidential government information cannot be used to profit from prediction market activity, regardless of the platform involved.

Executive order sets rules and penalties for government employees

The order establishes firm boundaries for executive branch employees by prohibiting both the use and disclosure of confidential information on prediction markets.

Any non-public information obtained through government employment that could influence prediction market outcomes must remain confidential. Employees are also prohibited from passing that information to others who may trade on their behalf or benefit financially.

Violations carry serious consequences, such as disciplinary actions like dismissal. Cases involving potential criminal conduct can also be referred to law enforcement authorities. The decision follows reports raising concerns about insiders allegedly profiting from prediction markets through privileged government information. 

One popular case involved allegations that United States Army member Gannon Ken Van Dyke earned more than $400,000 on Polymarket contracts using classified information linked to Venezuelan President Nicolás Maduro.

Arizona separates ethics reforms from its legal dispute with Kalshi

Earlier this year, California updated its insider trading framework to include prediction markets, confirming that existing restrictions on confidential government information also apply to modern event-based trading platforms.

Arizona has adopted a similar ethical position while pursuing legal action against prediction market operator Kalshi. State officials argue that some contracts resemble unlicensed sports betting, while the company argues that its products are federally-regulated financial derivatives overseen at the national level. 

The company challenged Arizona’s cease-and-desist order in federal court and secured a temporary restraining order for operations to continue while litigation proceeds. By issuing this executive order separately from that legal dispute, Arizona has drawn a distinction between market regulation and public sector ethics. 

Regardless of how courts classify prediction markets, the state has made its position clear that government employees cannot use confidential information for private financial gain.

Arizona authorities have passed an executive order prohibiting government officials from trading on prediction market platforms with insider information. Failure to comply with this directive will attract penalties, such as dismissals from position and heavy fines.