The European Securities and Markets Authority has warned that prediction markets are “rife” with insider trading.
In its latest Trends, Risks and Vulnerabilities report, ESMA said the structure of prediction markets can make misconduct difficult to identify and prevent. The regulator highlighted limited identity verification on some platforms, saying this can make it harder to establish who is behind trades.
ESMA said these weaknesses create particular risks around insider trading, wash trading and coordinated market manipulation, while platform monitoring often begins only after events have occurred and profits have already been realised.
Recent cases show how information advantages can be exploited
Newly created wallets allegedly generated $1.2m in profits shortly before the February 2026 US-Israel strikes on Iran.
It cited a US soldier charged over the alleged use of classified information to trade on Polymarket before the capture of Nicolás Maduro. A third case involved suspected tampering with weather sensors used to settle prediction market contracts.
“A growing number of incidents illustrates prediction markets are rife with inside trading,” ESMA said. “While platforms claim to monitor suspicious trading activity and freeze accounts deemed dubious, such measures are largely reactive, as investigations are often initiated only after the event has occurred and the profits have already been realised.”
The regulator also warned about AI-generated trading signals, algorithmic strategies and bots, which could increase information asymmetries, volatility and coordinated activity.
“AI- generated misinformation, misleading viral content or coordinated online campaigns may influence market sentiment, distort pricing dynamics and affect the perceived probability of underlying events,” the regulator said.
ESMA also raised concerns about profit concentration. Citing Wall Street Journal analysis, it said 67% of Polymarket profits went to 0.1% of accounts, while Bloomberg analysis found most users lose money.
Prediction markets remain smaller in Europe but warrant closer monitoring
Despite these concerns, ESMA said prediction markets remain “relatively limited” across the EU compared with their rapid expansion in the US.
Only a small number of operators are active in Europe, while US prediction markets are increasingly competing with traditional sports betting companies.
However, ESMA said recent developments point to “increasing institutional interest”, links with crypto-assets and wider retail participation.
That combination led the regulator to recommend continued oversight as the sector develops.
“Continued monitoring is warranted given the rapid pace of market developments, the emergence of new risks, and evolving regulatory approaches outside Europe,” it said.
ESMA’s warning shows that prediction markets are facing the same integrity problems seen in traditional financial markets. However, the industry lacks mature surveillance systems. The main challenge is that reactive account freezes do little once information advantages have been converted into profits.
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