Inside Kalshi's Insider Trading Enforcement: Two Recent Cases Revealed

Kalshi, a regulated prediction market exchange, has revealed details about two insider trading cases it recently closed, offering transparency into how it identifies suspicious activity and enforces trading rules.

The exchange, which bans insider trading as part of its regulatory compliance, opened 200 investigations over the past year and froze numerous flagged accounts. Of those investigations, more than a dozen became active cases. Kalshi's decision to disclose these two cases follows customer questions about how violations are identified and enforced.

Case 1: Political Candidate Trading on Own Election

The first case involved a candidate for Governor of California who traded approximately $200 on his own candidacy and then posted about it on social media. This violated multiple Kalshi rules, including prohibitions against trading on material non-public information and self-dealing.

Kalshi's surveillance systems flagged the trades, and the exchange immediately froze the candidate's account. The candidate was initially cooperative and acknowledged the rule violation. However, the case resulted in a 5-year ban from the platform and a financial penalty equal to 10 times the initial trade size.

Interestingly, the candidate has since announced he is no longer running for Governor and is now instead running for Congress.

Case 2: YouTube Editor's Market Manipulation

The second case involved an insider who traded approximately $4,000 on YouTube streaming markets, violating Kalshi's insider trading rules. This trader worked as an editor for a popular YouTube streamer and likely had access to material non-public information connected to the trading activity.

Kalshi's surveillance systems detected the trader's near-perfect success rate on markets with low odds, which was statistically anomalous. Additionally, multiple Kalshi users independently flagged unusual trading patterns they observed in publicly available trading data.

The investigation revealed the trader's employment connection to the streamer, leading to a 2-year suspension from the platform and a financial penalty equal to 5 times the initial trade size.

Enforcement Process and Penalties

In both cases, Kalshi's surveillance team froze the traders' accounts upon detecting suspicious activity. Neither trader was able to withdraw any profits before their accounts were frozen.

The exchange emphasizes that these penalties are not indicative of future penalties, as enforcement depends on various factors including the amount traded and specific rules violated.

Kalshi has reported both cases to the Commodity Futures Trading Commission (CFTC), as required by regulation. The exchange will donate the fines imposed to a non-profit organization that provides consumer education on derivatives markets.

Surveillance and Investigation Methods

Kalshi's enforcement process begins with its surveillance systems, which continuously monitor trading patterns for anomalies. When suspicious activity is detected, accounts are immediately frozen to prevent further trading or withdrawals.

The exchange then conducts thorough investigations, collecting evidence and applying its disciplinary process fairly. In the political candidate case, the surveillance department saw an online video showing the candidate trading on his own candidacy, prompting immediate action.

For the YouTube editor case, the combination of statistical anomaly detection and user-submitted tips led to the investigation. The publicly available nature of trading data allowed multiple users to independently identify unusual patterns.

Commitment to Market Integrity

Kalshi acknowledges that no system is perfect and that no financial exchange is immune from bad actors. The exchange compares itself to stock exchanges, banks, and other prediction markets, all of which face similar challenges with market manipulation and insider trading.

"We're committed to deterring and finding the bad actors, manipulators, and those who willingly cheat," Kalshi stated in its disclosure.

To further enhance transparency, Kalshi recently announced an independent Surveillance Audit Committee that will produce quarterly reports on flagged trades, open and closed investigations, and cases referred to government authorities for enforcement.

The exchange plans to disclose additional cases on its notices page, following the model used by CME Group and other regulated exchanges. This approach aims to build trust with users while demonstrating the effectiveness of Kalshi's surveillance and enforcement systems.

Kalshi's disclosure represents a significant step toward transparency in the prediction market industry, where regulatory compliance and market integrity are critical concerns. By sharing these enforcement actions, the exchange hopes to deter potential violators while educating users about the consequences of insider trading.