Why Hadrius Built Prediction Market Monitoring

Today, Hadrius is launching prediction market trade monitoring: a new view within our Trade Surveillance module that allows firms to monitor their employees' prediction market activity.

Employees connect their Kalshi and Polymarket accounts through the same disclosure flow they already use for brokerage accounts, and every event-contract trade flows into the same supervisory dashboard as their equities and crypto activity. The feature is available to all current Trade Surveillance customers.

Why we built it

At a moment when prediction markets are dominating headlines and officials are under pressure to define their stances, Hadrius is excited to offer our clients a way to stay ahead of what we believe is an imminent regulatory requirement.

To be fair, not everyone in the compliance space shares that view. Over the course of building this tool, we spoke with many practitioners who responded with a degree of apprehension. Here was a question we heard often: Why would I want to know about activity I’m not required to know about? Why look into something, the thinking goes, that won't come up on an audit exam?

It's an understandable response. The last thing a CCO wants to do is electively expand the surface area for which they're responsible. The reality, however, is that prediction markets will almost certainly be regulated.

In our view, it's a question of when, not if.

People from all walks of life, including RIAs and broker-dealers, are already using prediction markets to trade on non-public information. Enforcement actions have already been initiated against users of these marketplaces. The surface area of risk, in other words, has already expanded. The fact that regulation hasn't yet caught up doesn't mean prediction markets are something CCOs can afford to ignore.

What a prediction market is

A prediction market is a venue where users trade contracts whose payouts depend on real-world events. Will the Fed cut by 50 bps in September? Will a specific company be acquired by year-end? Each "yes" contract resolves to $1 if the event occurs and to zero if it doesn't. The price in between functions as a market-implied probability.

Prediction markets, in our view, are a good thing. (Perhaps not a surprising belief; prior to co-founding Hadrius, I founded and ran a prediction market.) These venues effectively turn the wide universe of information into tradeable securities. This, in turn, surfaces non-public information in a way we’ve never really seen before.

Essentially, any information can now be turned into an efficient price. This yields unprecedented insight into collective sentiment. Never before, for example, have U.S. citizens been able to see their shifting expectations about an upcoming election reflected back to them in such granular, longitudinal, and transparent detail. In the same way equities markets quantify information about specific companies, prediction markets quantify information about virtually anything: the next CPI print, an antitrust ruling, whether storms in Brazil will affect coffee exports. 

Institutional investors have long had access to some of this exposure; now everyone can invest in nearly everything. The trading possibilities are endless. Not since crypto have we seen such a compelling new asset class emerge.

With that innovation, however, comes risk. And risk, inevitably, leads to regulation.

Why regulation is coming

Prediction market trade surveillance may not be required by law today, but these markets are anything but flying under the radar. In May, the CFTC, which asserts sole jurisdiction over regulating prediction markets, announced that it was "in talks with all the professional sports leagues" to collaboratively address insider trading and market manipulation. (Sports betting accounts for more than 80% of prediction market activity.)

Other departments of the government are paying attention, too. The DoJ is already pursuing cases tied to event-contract trading. Federal and state lawmakers have floated bills. The U.S. Senate has barred its own staffers from using these platforms. Moreover, algorithmic and quantitative shops are now meaningful participants in these markets — a development that has historically accelerated regulator attention. Together, these signals point clearly toward where the policy conversation is heading.

A regulatory framework is almost certainly coming. In our estimation, the only question is whether that framework dictates the rules of compliance or an outright ban for covered persons.

Start creating an informed policy

Given the type of activity that prediction markets enables, it’s difficult to argue that oversight wouldn’t benefit compliance owners inside regulated firms.

Consider this. Imagine your firm has successfully advised a client to acquire a strategic position in a company. Days before the transaction, someone uses a prediction market to bet on a jump in that company's price. Imagine the account is tied to one of your brokers.

Or imagine one of your employees is on a restricted list for a company under active coverage. They can't buy the stock. One day, you discover they’ve traded event contracts on the company’s quarterly earnings on Kalshi.

Now estimate the likelihood that an auditor will overlook behavior like this simply because prediction market trade surveillance isn’t technically required of you now.

This is why we at Hadrius recommend against the wait-and-see approach, and why we built the feature we’re launching today. With prediction market monitoring, you gain defensible audit trails and records built for the moment regulatory scrutiny arrives. You also gain the kind of insight that helps you understand a baseline of trading activity, so that when the time comes to develop a formal policy around prediction market trading, you can do so informed by real, historical data.

Prediction markets are here to stay. Your employees are already using them, non-public information is being monetized, and regulators are paying attention. The most audit-ready firms of the future are the ones who, today, are starting to think about prediction markets as an area to which regulation will surely arrive. Probably sooner rather than later.

‍Prediction Market Trade Monitoring is available to all customers in Hadrius's Trade Surveillance module now. To see it for yourself, request a demo.