The European Securities and Markets Authority published a formal warning on September 10, 2026, identifying prediction markets as “rife with insider-trading” in its latest Trends, Risks and Vulnerabilities report. The regulator singled out Polymarket and Kalshi as examples of fast-growing platforms that are proving difficult to supervise under existing EU rules.
ESMA’s Warning on Prediction Market Integrity
ESMA’s September 2026 report identifies three recurring incidents across prediction-market platforms: large pre-event wagers tied to sensitive developments, clusters of accounts with unusually high win rates, and alleged manipulation around event inputs such as weather data. The evidence on concentration is striking. A Wall Street Journal analysis found that 67% of Polymarket gains went to just 0.1% of accounts.
That is an astounding statistic. A separate incident documented by blockchain analytics firm Bubblemaps traced nine linked accounts to $2.4 million in Iran-related bets carrying a 98% win rate, with new wallets showing $1.2 million in activity placed hours before a February 2026 airstrike on Iran.
Detection is structurally hampered by the platforms themselves. Polymarket operates on blockchain infrastructure with pseudonymous wallets and minimal identity verification. Kalshi, while CFTC-regulated in the United States, lacks a comparable supervisory framework in Europe. ESMA notes that investigations are typically reactive, beginning only after events conclude and profits are realized. By then, wallet activity has dispersed and the investigative trail has cooled.
The regulator’s concerns are compounded by the pace of growth of these platforms. Polymarket recorded quarterly volume of $12 billion through the January to November 2025 period; Kalshi reported $8.8 billion over the same window. Combined monthly volume across both platforms reached $44.8 billion by June 2026.
At that scale, even a small proportion of informed trading represents material market distortion, and ESMA’s supervisory capacity has not expanded proportionally. The mismatch between platform growth and regulatory bandwidth is a major problem for EU oversight bodies attempting to enforce rules designed for conventional financial instruments.
The core legal problem is a classification gap. Whether insider-trading rules apply to prediction-market contracts in the EU depends on whether those contracts qualify as financial instruments under EU law. Binary-options rules currently bar selling event contracts to retail investors in Europe, which has kept prediction-market volume modest compared with the United States. But that restriction has not produced tighter surveillance; it has largely produced a smaller, harder-to-monitor gray market operating across crypto-native infrastructure that falls between jurisdictional boundaries.
The practical consequence is that EU retail investors are largely excluded from participation while sophisticated actors with information advantages face minimal deterrence. ESMA’s report stops short of formal rulemaking proposals, but the warning signals that classification and supervision of event-contract platforms will become an active regulatory focus heading into 2027.
About ESMA
The European Securities and Markets Authority is the EU’s financial-markets regulator and supervisor, established in January 2011 and headquartered in Paris. ESMA operates as an independent authority within the European System of Financial Supervision, working alongside national competent authorities across EU member states to promote stable and orderly financial markets. Its mandate covers investor protection, supervisory convergence, and systemic risk monitoring across securities and derivatives markets.
ESMA’s Trends, Risks and Vulnerabilities reports are published twice yearly and function as the regulator’s primary market-surveillance output. The reports are closely followed by institutional investors and compliance teams because they frequently precede formal rulemaking or enforcement action by twelve to eighteen months. ESMA’s September 2026 edition is the first to dedicate substantive coverage to prediction markets as a standalone risk category, a threshold shift from the brief passing references in prior reports.
The regulator’s recent regulatory activity includes the May 2025 release of PS25/4, which addressed research payment rules under the UK’s post-MiFID II unbundling framework, as well as ongoing work on issuer-sponsored research standards following the Listing Act Directive, which entered into force in December 2024.
The October 2025 final report on draft regulatory technical standards for an EU Code of Conduct on issuer-sponsored research, published in response to a December 2024 consultation, illustrated ESMA’s ongoing effort to use soft-law frameworks where hard legislative action would be slow or disproportionate. The prediction-market warning follows the same approach: identify the risk publicly, establish a supervisory record, and preserve the option of a more formal response if platform volumes or incident rates continue to climb.
The EU’s current binary-options framework, which restricts event-contract sales to retail investors, creates a structural divergence from the US approach. CFTC-regulated operators like Kalshi can offer products broadly in the American market, while EU-based or EU-facing platforms face constraints that have suppressed retail participation without meaningfully limiting sophisticated or crypto-native actors.
ESMA’s report implicitly acknowledges that the binary-options framework was not designed with contemporary prediction-market architecture in mind, and that the supervisory gap it has produced is now visible enough to require a policy response.
Implications for Institutional Participants
ESMA’s warning carries immediate relevance for asset managers and hedge funds that have begun integrating prediction-market data into research workflows. Ark Invest’s publicly disclosed partnership with Kalshi, announced in March 2026 and detailed further in April 2026, represented the most prominent institutional endorsement of prediction-market data as a research input.
The ESMA report does not name any institutional participants, but the regulator’s focus on concentration of gains and the prevalence of informed trading raises a direct question for compliance teams: if 67% of platform gains accrue to 0.1% of accounts, what is the probability that an institutional firm acting on prediction-market signals is inadvertently trading alongside, or in front of, a concentrated position built on non-public information?
That question does not yet have a regulatory answer in the EU, and ESMA’s report does not provide one. But the positioning of prediction markets as a surveillance priority shifts the risk calculus for compliance officers at firms with EU-based operations.
Using prediction-market data as a research input is legally distinct from trading the contracts directly, but the reputational and regulatory exposure associated with signal sources flagged by ESMA is real. Firms that have not yet established internal policies distinguishing data use from direct contract participation will likely need to do so in the coming months.
The divergence between the EU and US regulatory approaches is unlikely to narrow quickly. CFTC Chairman Michael Selig signaled in February 2026 that the agency intended to promote responsible innovation rather than restrict platform development, effectively withdrawing the June 2024 proposed rulemaking on event contracts.
ESMA’s September report moves in the opposite direction, treating rapid growth and supervisory opacity as reasons for concern rather than accommodation. Whether that divergence produces competitive pressure on US operators to adopt stricter identity and surveillance standards, or simply entrenches the existing geographic split in platform access, will shape how prediction markets develop as an asset class over the next two to three years.
Our Take
ESMA’s warning is less a regulatory action than a declaration of intent. The regulator has now established a public record identifying prediction markets as a surveillance priority. That creates the foundation for formal rulemaking if incident rates persist or platform volumes continue to grow at their current pace into 2027.
The concentration data is the most consequential detail in the report. When 67% of gains on a platform flow to 0.1% of accounts, the platform is not functioning as a market that aggregates dispersed information.
It is functioning as a venue where a small number of informed actors extract value from a larger pool of uninformed participants. That dynamic is not unique to prediction markets, but the crypto-native infrastructure that powers Polymarket makes it structurally harder to detect and deter than equivalent behavior in conventional financial instruments.
For institutional research teams that have adopted prediction-market data as a useful alternative data source, the ESMA report introduces a compliance consideration that did not exist six months ago. The signal quality argument for these platforms rests partly on the assumption that prices reflect aggregated crowd intelligence. If a substantial share of price-moving activity is instead driven by actors with material non-public information, the analytical premise weakens alongside the regulatory comfort.
The US-EU divergence on event contracts is now a live commercial variable. Kalshi and Polymarket have built their institutional growth stories in a permissive US regulatory environment. ESMA’s positioning suggests that environment will not extend to Europe without significant changes to identity verification, surveillance infrastructure, and potentially the legal classification of event contracts.
How quickly the CFTC responds to the pressure that a formal ESMA enforcement action would generate, should one materialize, will determine whether this remains a regional divergence or becomes a structural constraint on the global prediction-market industry.
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