Prediction Markets and the Expanding Control Surface

Prediction markets came up repeatedly during conversations at last week's After the Bell gathering in New York.

Part of that was timing. News of the StarCompliance and Kalshi partnership had just been announced. But what caught my attention wasn't the announcement itself. It was the reaction to it. Some executives immediately accepted the idea that prediction markets could represent the next evolution of capital markets. Others were skeptical. Not dismissive – but skeptical. The kind of skepticism that suggests a person is reconsidering an assumption rather than rejecting an argument.

I found myself returning to a question I explored earlier this year in Reimagining Insider Trading for a World Beyond Securities:

The more important question is: What happens when economically valuable information can be monetized through venues outside traditional securities markets?

What Prediction Markets Really Reveal The debate around prediction markets often focuses on whether they will become a major asset class, a competitor to sports betting, or simply another niche product. Those questions are interesting. But they may also be distracting.

The most significant development is that prediction markets create another venue through which information can be transformed into economic gain.

Leveraging information itself, or edge, is not new. Capital markets have always rewarded those who possess better information, interpret it more effectively, or act on it faster than others. What's changing is the range of venues through which that information can be monetized.

For decades, compliance frameworks have largely been built around a familiar architecture: securities, issuers, broker-dealers, exchanges, and investment advisers. The underlying assumption was that economically valuable information would generally find its way into a traditional financial instrument.

Not any more. Prediction markets are just the latest example - not the first. And with the speed of innovation, likely not the last.

Whether the underlying event involves an election, a regulatory decision, a macroeconomic release, a sporting event, or something else entirely, information can increasingly be monetized - and potentially abused - through channels that sit outside traditional securities markets.

That should sound familiar. Many of the most significant compliance challenges of the past decade emerged when business activity expanded faster than the frameworks designed to govern it. Electronic trading, alternative data, digital assets, and private markets each created new questions around surveillance, supervision, conflicts, information barriers, and control design.

Prediction markets are following the path. It’s a mistake to view them solely as a new product because market structure changes rarely announce themselves as market structure changes. They usually arrive disguised as niche products, edge cases, or specialized activities before gradually becoming part of the broader ecosystem.

The Compliance Question

My point in this brief is less about whether prediction markets ultimately become the next major market structure, even though I think it is. The point is that prediction markets are forcing all of us to revisit assumptions that have not changed in decades. And that creates an important challenge for compliance leaders.

As new venues emerge through which information can be monetized, firms will need to determine whether existing controls remain fit for purpose. Surveillance models, personal trading frameworks, information barrier policies, conflicts management programs, and supervisory structures were largely designed around a different market architecture.

The question is no longer whether prediction markets are interesting.

The question is whether they are signaling a broader shift in how information flows through markets.

If they are, compliance leaders have a lot less time than they think to adapt.