Prediction Market Integrity and Geopolitical Risk Arbitrage: Navigating the Risks and Opportunities of Insider Influence

The rise of prediction markets has transformed how investors and analysts gauge geopolitical and political outcomes. Platforms like Kalshi, Polymarket, and PredictIt have attracted billions in trading volumes, offering real-time insights into events ranging from elections to corporate mergers. Yet, as these markets expand, so too do concerns about their integrity. Unregulated or loosely regulated platforms, in particular, face mounting scrutiny over insider trading, market manipulation, and the ethical implications of betting on real-world events. For investors, the challenge lies in balancing the opportunities for arbitrage with the risks of systemic instability and regulatory backlash.

The Integrity Crisis in Unregulated Prediction Markets

Prediction markets operate on the premise of aggregating collective intelligence to forecast outcomes. However, the absence of robust oversight in many platforms has created fertile ground for abuse. A 2025 report by highlights that unregulated markets like Polymarket have seen instances of wash trading-where traders artificially inflate volume by buying and selling without net positions-reaching 60% in December 2024 before declining to 25% by October 2025.

Such practices distort price signals, undermining the market's ability to function as a reliable information aggregator.

Insider trading remains a particularly thorny issue. In 2023, Polymarket faced allegations of traders exploiting non-public information to profit from bets on the ouster of Venezuelan President Nicolás Maduro. While no formal charges were filed, the incident spurred legislative action, including Rep. Ritchie Torres' 2026 Public Integrity in Financial Prediction Markets Act, which seeks to prohibit federal officials from using insider knowledge in these markets. The lack of clear legal definitions for insider trading in prediction markets exacerbates the problem, as the Commodity Futures Trading Commission (CFTC) lacks the enforcement tools of the SEC.

Geopolitical Risk Arbitrage: Opportunities and Pitfalls

Despite these risks, unregulated prediction markets have become a hub for geopolitical risk arbitrage. Traders exploit mispricings across related events or markets, leveraging both public and non-public information. A 2025 study, Unravelling the Probabilistic Forest: Arbitrage in Prediction Markets, estimates that arbitrage strategies on platforms like Polymarket generated $40 million in profits between April 2024 and April 2025. For example, during the 2024 U.S. election cycle, traders identified opportunities in combinatorial arbitrage by purchasing overlapping bets on candidates whose combined probabilities summed to less than 100%, guaranteeing a profit regardless of the outcome.

However, such strategies are not without peril. The same study notes that geopolitical events-such as regime changes or military conflicts-introduce sharp price volatility, increasing the likelihood of misjudged bets. A case in point is the unauthorized editing of a Russo-Ukrainian War map to resolve a Polymarket bet on the capture of Myrnohrad. While the incident was later attributed to a technical error, it underscored the vulnerability of unregulated markets to manipulation.

Regulatory Fragmentation and the Path Forward

The regulatory landscape for prediction markets remains fragmented. Kalshi, the first U.S. platform to operate under CFTC oversight, has faced its own hurdles, including restrictions on election-related markets due to concerns about "gaming". Meanwhile, platforms like PredictIt, which previously operated under a no-action letter, have been forced to defend their legality in court. This patchwork of rules creates arbitrage opportunities for both traders and regulators, as platforms exploit jurisdictional gaps to maximize liquidity.

For investors, the key lies in navigating this uncertainty. While prediction markets offer unique insights into geopolitical and political trends, their integrity depends on the strength of regulatory frameworks. As Raj Ashar notes in Insider Trading in the Era of Event Contracts, the lack of enforcement in these markets leaves room for exploitation, particularly in high-stakes geopolitical events.

Conclusion: Balancing Innovation and Integrity

Prediction markets represent a fascinating intersection of finance, technology, and politics. Yet, their potential is constrained by the risks of insider influence and regulatory arbitrage. For investors, the challenge is to harness the opportunities these markets offer while mitigating the risks of systemic instability. As the CFTC and lawmakers grapple with defining the boundaries of these markets, one thing is clear: the future of prediction markets will be shaped not just by their predictive power, but by their ability to maintain integrity in the face of growing scrutiny.