Prediction market bets on Iran strikes stoke insider trading, ethics scrutiny

By Tom Westbrook

SINGAPORE/NEW YORK, March 2 (Reuters) - Bets on the potential death of Iran's Supreme Leader Ayatollah Ali Khamenei drew fresh scrutiny of prediction markets such as Polymarket and Kalshi, and sparked threats from U.S. lawmakers to outlaw the controversial fast-growing wagers.

Khamenei was killed in Israeli air strikes on Iran's capital Tehran over the weekend. U.S. lawmakers and analysts flagged bets placed on his ouster both in January and right before the attacks, stoking long-simmering concerns over the legality and ethics of such trades, and the potential for insider trading.

According to a Reuters review of Polymarket's website, $529 million was laid on a series of contracts tied to the timing of attacks, and $150 million was bet on contracts on the removal of Khamenei as supreme leader.

Analytics firm Bubblemaps said on X that six accounts made a $1.2 million profit from Polymarket bets funded in the hours before Saturday's raids. Rival Kalshi also ran a market on "Khamenei out."

"It's insane this is legal," Democratic Senator Chris Murphy said on X on Sunday in response to Bubblemaps' post, adding -without providing evidence - that people around President Donald Trump were profiting from the conflict. "I'm introducing legislation ASAP to ban this."

The White House did not immediately respond to a request for comment.

California Representative Mike Levin, a Democrat, also took to X on Saturday to flag a Polymarket bet placed shortly before the Iran strikes.

"Prediction markets cannot be a vehicle for profiting off advance knowledge of military action. We need answers, transparency, and oversight," he wrote.

Democratic senators on February 23 had also raised concerns that prediction markets breached U.S. rules, and created incentives to foment conflict and disclose classified information after a mystery trader made a roughly $410,000 profit betting on the ouster of Venezuelan president Nicolas Maduro.

Polymarket and Kalshi did not immediately respond to requests for comment but have argued that prediction markets harness the wisdom of crowds to create accurate, unbiased forecasts.

Kalshi chief Tarek Mansour said on X that the company's rules aimed to prevent profiting from death. Kalshi is a regulated platform and says it bans insiders.

LEGAL QUESTIONS

Prediction markets have exploded in popularity since the 2024 U.S. election, when their real-time probabilities proved more accurate than polling in forecasting Donald Trump's victory.

They offer tradable yes-or-no contracts that allow users to bet on a wide range of real-world events from sports to politics and the economy. Bet costs fluctuate between zero and 100 cents, and typically pay out when an outcome is confirmed.

Under U.S. law, wagers contrary to the public interest - which may involve or relate to war or assassination - are prohibited. Trading on nonpublic information may be illegal, depending on the market, the nature of the information and who is trading it.

The platforms have grown in a regulatory grey area, with the Commodity Futures Trading Commission, which oversees the majority of listed derivatives trading, losing a battle in court to ban their bets on the outcome of U.S. elections.

The CFTC has since said it believes prediction markets are within its purview and plans to create a federal framework to oversee them.

A CFTC spokesperson did not respond to a request for comment on Monday.

Last year prediction markets enjoyed $47 billion in global trading volume, according to analysts at brokerage Clear Street, drawing attention from traditional Wall Street firms keen to get a slice of the action.

New York Stock Exchange parent ICE ICE.N has taken a $2 billion stake in Polymarket, while trading platform Plus500 PLUSP.L last month launched prediction markets on its U.S. retail interface through a partnership with Kalshi.