The US Is Betting On AI To Catch Insider Trading In Prediction Markets

The CFTC says it is ramping up efforts to catch insider trading and market manipulation in prediction markets, using AI tools, blockchain tracing, and other surveillance systems to flag suspicious bets. It’s also monitoring activity by U.S. traders accessing offshore platforms like Polymarket through VPNs. Wired reports: [T]he Commodity Futures Trading Commission, which oversees prediction markets, wants you to know that it’s watching very, very closely. The agency is searching for suspicious behavior from traders within the United States who have been sneaking onto offshore markets, including Polymarket’s crypto platform — which is blocked stateside — by using virtual private networks. “We’re going to find them, and we’re going to bring actions,” agency chairman Michael Selig told WIRED this week, speaking from the CFTC’s headquarters in Washington, DC. Selig says the agency, which is especially lean right now, is staffing up. Like so many other AI-pilled workplaces, the CFTC is also leaning into automation to handle the growing workload, including tools that analyze trading patterns and flag potential manipulation. “You’ve got so much data,” Selig says. “When we feed it into AI, we get really great information. It can help us understand things, like where we might want to investigate, or when we might need to send a subpoena to a trader.”

In addition to proprietary surveillance systems developed in-house, the agency’s arsenal includes third-party blockchain tracing tools like Chainalysis for crypto platforms, and market abuse detection software including Nasdaq Smarts for centralized markets. (Beyond Nasdaq Smarts, the agency did not specify which AI tools it uses and declined to share more specific examples.) […] Selig recently told Congress that the company is pursuing “hundreds, if not thousands” of insider trading tips. Investigations are not limited to federally regulated exchanges. “We’re surveilling the markets on a global basis,” he tells WIRED.

Selig says that the agency will exert extraterritorial jurisdiction — its legal ability to enforce its laws beyond traditional boundaries — when it finds suspicious activity on offshore platforms like Polymarket, though he says it’s a case-by-case approach. “We use it in extreme circumstances,” he says, with an eye towards whether charges have a strong chance of sticking in court. “In any extraterritorial litigation, there’s going to be challenges to our authority, and that could also impair our ability to bring cases in the future.” According to Selig, the 2010 Dodd-Frank Act allows the CFTC more leeway to pursue this kind of enforcement action, by giving it more authority over foreign swap activities that impact the US. When appropriate, the agency works with regulators from other countries, too. “For cases where we’re not sure we’ll win, or it’s less in our wheelhouse and more of a foreign matter, we would relay it to a foreign regulator,” he says. “We’re constantly referring cases.” […] Selig is insistent that the CFTC is only just getting started. The agency will identify wrongdoers, he says — no matter “how large or how small.”