Intel Snacks: Prediction Markets

Intel topic: Prediction markets

Snacks: Tunnock’s Tea Cakes and Twinkies

In this episode of Intel Snacks, Jenny Gai and Tom Armstrong examine the rapid growth of prediction markets and what this trend means for compliance teams..

As on-chain platforms like Polymarket expand access to event-based trading, volumes have increased significantly — from approximately USD 1.2 billion in early 2025 to over USD 20 billion by January 2026. These markets enable users to trade on binary, real-world outcomes — ranging from geopolitical developments to entertainment rankings — with prices reflecting implied probabilities.

This accessibility also introduces new compliance considerations. These include trading on material non-public information (MNPI), risks of market manipulation, and scenarios where participants may attempt to influence the underlying events themselves.

For compliance teams, the core takeaway is familiar but evolving. Traditional market abuse indicators still apply, but they now intersect with transparent, on-chain data. Signals such as newly created wallets placing disproportionately large, high-conviction positions, activity clustered around event resolution, and rapid fund flows to higher-risk venues may indicate potential abuse. Detecting this activity requires combining established surveillance approaches with blockchain intelligence to identify patterns consistent with manipulation or illicit gain in these emerging markets.

Transcript

​​Jenny Gai (00:00): 

Hi, I'm Jenny Gai. 

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Tom Armstrong (00:02): 

I'm Tom Armstrong. 

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Jenny Gai (00:04): 

Welcome to Intel Snacks. This is a series where we unpack an interesting piece of intel or a current event and what it means for compliance teams. And we do this while eating snacks. Today we are going to talk about prediction markets, which has been a really hot topic in the news. But before we dive in, Tom, tell us about the snacks that we're going to be eating today. 

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Tom Armstrong (00:26): 

People know I have a sweet tooth now. So from the other side of the pond, we have Tunnock cakes, which was founded by Tom Tunnock circa what, 1890. I saw this on snack wars. We're doing Tunnock cakes. 

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Jenny Gai (00:41): 

I can't wait. So stay till the very end to get some very candid snack reactions as we try our Tunnock cakes. But now let's dive in. So we're going to talk prediction markets. This is really interesting because they're not a new concept, this kind of idea of trading on information. I definitely studied these in my econ classes at grad school, but right now they are really taking off. So before we talk about the trends and what we're seeing, Tom, do you want to give a quick overview just on what they are and how do they work? 

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Tom Armstrong (01:14): 

Yeah, let's do it. Let's dive into these. This is, as you said, just such an interesting topic right now. You've probably heard the name if you haven't actually placed a bet on one of these prediction markets yourself. You've probably heard the names, seen headlines. Maybe you've seen a Polymarket chart on Twitter or on CNBC, but maybe we just start with kind of what they are. At the core, it's really just a platform where you can buy and sell contracts. Contracts meaning like a trade that's tied to a real world outcome. So not necessarily company earnings or currency pairs, although there are some that are out there like that. The vast majority of these contracts are based around real world events. Did this thing happen? Yes or no? And the really interesting thing that we're saying is that you can place a bet on almost anything if you go to Polymarket right now, we're recording this on Friday afternoon. 

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(02:00)

There are bets on the masters elections in Peru and Hungary or the price of crude oil. Will it be a certain amount on a certain date, right? Really big ticket items. But then there's much more granular events like will JD Vance meet with Iran before April 15th? What's going to be the number two global Netflix show this week? So the breadth is remarkable. And because these markets operate largely on chain or on chain exchanges, they're accessible to retail participants in a way that traditional derivative markets never really were. And then mechanically, basically you see a market, will the Fed cut rates by July 31st or whatever the date is, right? The contract may say the price is 60 cents, right? That price is basically the market's implied probability. So there may be, if it's 60 cents, it's a 60% probability that it's a yes, right? And then the payout is if you win is a dollar and if it doesn't pay, it's zero and you basically make or lose the difference. So that's basically what they are. Very, very binary outcomes. And as you said, really, really starting to take off. 

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Jenny Gai (03:11): 

The volume in which it's taken off has been incredible. So we did some research here at TRM and found that from early 2025 to January of this year, the prediction market trade volume has pretty much 20 x-ed from 1.2 billion in early 2025 to over 20 billion in January of 2026. And as you mentioned, part of this is because of the just expansion of events that people are betting on, and I think most notably in why we've seen a lot of prediction markets in the news, just mainstream news recently is because of bets placed over the events of the Iran war. So are there currently any guardrails in place for the types of trades and what you can bet on? 

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Tom Armstrong (03:59): 

Yeah, so I think there's a couple of things to be said there. Just in terms of the risks. There are some on the terms and conditions in these websites, they say that there is some level of, call it quality assurance on the actual market that you're trying to make itself. And there really has to be a market to make, right? If we placed a bet on will Tom and Jenny's Intel Snacks episode go over five minutes, no one's going to bet on that. So there is some level, but it's not clear exactly to what level of extent they go to actually control the markets that are out there. So that's kind of one. And then you've got layered in all these kind of other market abuse type risks. So the one that's really making the headlines right now is the idea of just trading on material non-public information or MNPI. 

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(04:44)

And it's not just trading on MNPI, but it's really are you trading in a market that you can directly control the influence on the outcome? So prediction markets are really only useful as information aggregators if the prices reflect widely available public information. Once it becomes someone trading on MNPI, there's no integrity in that market and it can just be an extraction mechanism to get value. And as you said, we've kind of had some really high profile examples of this in the past few months. So the one that most people probably heard about was a trader on Polymarket on whether Venezuelan President Nicholas Maduro would be ousted. And just hours before the US forces kind of came in, the trader had placed the bet, walked away with hundreds of thousand dollars in profit. So that's definitely a big one that's causing a lot of concern. 

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(05:36)

There's also manipulation of the underlying event itself, and this risk is maybe a little bit more exotic, but think about if a market has a large enough notional value attached to a specific outcome, does that create an incentive to make that outcome happen? That sounds extreme, but it's a legitimate concern that regulators have flagged and that has been published in a number of studies on whether that actually then will influence the choice that the people can make who control that decision. So particularly for markets that are tied to political decisions or government actions or military interactions, that is a big area of concern. The big question here is where will the regulators take some of this? And it gets a little bit complicated. It really depends on a lot of factors in terms of who regulates the markets. The CFTC has come out and staked a position to say that these event contracts are swaps under the Commodity Exchange Act and they fall under federal jurisdiction. States may have state gambling authorities may want a piece of that regulatory action to the extent that the traders are actually in the states. There are several cases that are working themselves through the court of appeals. If we end up with split decisions there, we could see a case that the Supreme Court, there's also potential bills that have been proposed to curtail some of these risks. So it's like many things in crypto an ever-changing regulatory landscape right now. 

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Jenny Gai (07:02): 

Yeah, for sure. I think the topic of prediction markets, and we've talked about this just philosophically, is really interesting about what it kind of showcases in human interest and human thought. But practically speaking, we are starting to see some evidence of market manipulation. We even analyzed some patterns of pretty new wallets coming to these trading platforms, making bets on very specific events, looking like they have shared ownership, not making any previous trades walking away, tripling, doubling what their bets were, and then basically sweeping these to other wallets. And so if I am a compliance practitioner on the call, how do I start to think about this new typology and how can I look for it and what types of actions can I take or should I take? 

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Tom Armstrong (07:55): Yeah, you nailed a bunch of the big ones. What's so cool about crypto compliance is you're really taking, this is true. Whether we're talking about trying to find money laundering, typologies, or market abuse, you're really taking the kind of classic traditional red flags and just putting twists and wrinkles into them. And so when I think about prediction markets, my brain goes to penny stock kind of markets as well. There's a lot of parallels here. And so red flags you can think about is, you mentioned some of these, but did a person come in with no trade history place a very outsized bet on a single position, like a really high conviction trade and win big? What percentage of that trade represented the total trading volume on that day? Was the contract thinly traded because it's happening on chain, there's other signals and data points that we can leverage. 

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(08:40)

So after the winnings were paid out, did they ramp to a high risk exchange and some foreign jurisdiction was the bet placed by wild addresses that are completely brand new, as you said, they've never been used before. What about just the timing and proximity to the event? Did they have that bet in place weeks before or was it hours before the contract actually stopped? So those are all pretty familiar things if you've worked some of these market abuse cases that you can kind of take and leverage. And really, again, we have new data available and it's taking the new with the old to do the detection and prevention. 

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Jenny Gai (09:14): 

Yeah, super interesting topic. I think we could, this is one where we could spend a whole webinar talking through the different nuances, the different types of markets and bets, different typologies that we're starting to see and regulatory advances in this space. But we are almost at time. We promised that these would be bite size, which leads us to our snack. So while I unwrap my tonic cake, do you want to tell people what a Tunnock cake is? 

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Tom Armstrong (09:43): 

As best I know because we haven't tried them before. They say milk chocolate tea cakes. I don't know if that's a UK thing to call something that's really like a cookie, a tea cake. I see the word biscuits all over it. When I think of a biscuit, yeah, I think of biscuits and gravy. Biscuits are cookies, I think for our friends across the pond. So yeah, to me they look like, yeah, chocolate marshmallows. 

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Jenny Gai (10:16): I think that's a really good description. It's a chocolate covered if you've ever eaten marshmallow fluff, that's right underneath the chocolate. And then, yeah, I think there's kind of a shortbread cookie at the base.

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Tom Armstrong (10:32): 

The shortbread cookie is perfect. I love it. It falls apart really easily. But yeah, that's delicious. 

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Jenny Gai (10:46): This was a good choice. Was this better than Cheez-Its?

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Tom Armstrong (10:49): 

Totally a hundred percent. It's very airy too. To me, a perfect dessert. I don't have serving sizes. Serving size is the whole thing. It's the entire pine of ice cream. It's the entire bag of whatever I could eat. I could eat four or five of these and be totally good. Versus like a Reese's, you eat one and it feels pretty heavy. I like, these are nice kudos to our friends across the shore. 

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Jenny Gai (11:15): 

Yeah, I couldn't agree more. These are actually perfect. Not too sweet. I'm going to really enjoy finishing mine off camera. But thanks so much for staying for the snacks. Join us next time for new intel and new snacks.

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Frequently asked questions

1. What is a prediction market?

A prediction market is a platform where users buy and sell contracts tied to the outcome of real-world events. Each contract represents a binary result — typically “yes” or “no.” The price of a contract reflects the market’s implied probability of that event occurring. For example, a contract priced at 60 cents suggests a 60% likelihood of the outcome.

2. How do prediction markets work in practice?

Participants trade contracts based on whether they believe a specific event will happen. If the event occurs, the contract pays out a fixed amount (usually USD 1); if not, it pays nothing. Traders profit or lose based on the difference between their purchase price and the final outcome. These markets often operate on blockchain infrastructure, making them accessible to a broader set of participants.

3. What risks are associated with prediction markets?

Key risks include trading on material non-public information (MNPI), market manipulation, and the potential for participants to influence the outcome of events they are betting on. These risks can undermine market integrity, especially if prices no longer reflect publicly available information. Concerns are particularly elevated for markets tied to political, economic, or geopolitical events.

4. How can compliance teams detect suspicious activity in prediction markets?

Compliance teams can apply familiar market abuse indicators with a crypto-specific lens. Red flags may include new wallets placing large, high-conviction trades, unusual timing close to an event outcome, disproportionate market share in thinly traded contracts, and rapid movement of profits to high-risk exchanges. Blockchain data provides additional signals that can support detection and investigation.