K3 Insights

Insiders may be cashing in on offshore prediction markets while New Zealand law looks away

By Bennett Richardson

Betting on political upsets, corporate shake-ups and product launch dates might sound like harmless speculation. But as offshore prediction markets gain traction with New Zealand punters, they are quietly opening a fresh front for people with inside information to cash in while staying outside the reach of current insider trading rules.

Today, online betting extends beyond traditional sports and racing bets into more general prediction markets with offshore platforms. These sites invite wagers on everything from who will be New Zealand’s next prime minister to when a company’s new product will be released, and even how the price of shares in a company will change or whether a CEO will resign by a certain date.

Prediction markets suffer from suspiciously timed bets on events like US airstrikes against Iran, the capture of Nicolás Maduro, ChatGPT product release dates and Taylor Swift’s engagement. Where an anonymous person in the form of a wallet solely makes consecutive successful low probability bets, cashing in on insider knowledge is much more likely than them getting lucky or being astute.

K3 Legal’s Andrew Coffin says the law has not kept pace. While New Zealand’s insider trading regime clamps down on trading in listed securities and derivatives, it largely ignores bets that turn confidential knowledge about corporate events into profit. That gap leaves insiders with a tempting workaround, ordinary bettors exposed, and regulators struggling to police a booming market that sits somewhere between investment and gambling.

“While a person with insider information might not use it to trade company shares, they could utilise prediction markets to turn that information into profit,” he told NZ Lawyer.

When a ‘bet’ starts to look like insider trading

As an expert in financial markets, Coffin is familiar with where the gap in New Zealand’s legal framework starts to show. Sections 241 to 245 of the Financial Markets Conduct Act 2013 contain New Zealand’s core anti-insider trading provisions. Section 241 states that an information insider of a listed issuer must not trade quoted financial products of the listed issuer, and that an information insider in relation to quoted derivatives must not trade the derivatives.

“The problem is that making a bet on a prediction market does not usually involve financial products. At its core, a bet on a prediction market is a contract where you pay money to receive money conditional on an event occurring,” he explained.

Some of those events relate directly to financial products, such as betting that the share price of a company will increase by at least 20% by a particular time. Others do not, such as betting that a new product line will be released by a certain date or that a CEO will resign.

Those two categories matter.

“It might be possible to classify certain bets as derivatives, though we do not yet have any guidance from the courts on this point,” Coffin said. The statutory definition of a derivative is broad and on its face appears to cover most bets that are determined by the performance of a financial product, such as betting the share price will double in value by a particular time, he explained.

In contrast, bets on events disconnected from financial products are far harder to capture.

“A bet that a CEO will resign by a particular date may still hinge on confidential corporate information, but it does not fit comfortably within a definition built around assets, rates, indexes and commodities,” Coffin explained. On a purposive interpretation of the section 8(4) Financial Markets Conduct Act 2013 definition of derivatives, almost any contingent contract might fit the wording, yet dragging all such bets into the derivatives regime would cut across the structure of existing gambling law.

That leaves a stark reality. While the courts in New Zealand have not yet tested these points, it appears that we have a significant gap where insider trading provisions likely do not apply to bets relating to corporate events as opposed to financial products, Coffin said.

“The law does offer some backstops, but they are narrow. If a company’s directors use their insider knowledge to make bets on corporate events and make profit, they are likely to have breached fiduciary duties such as loyalty and non-profit that they owe to the company,” he explained.

Similarly, employees who exploit inside information in betting markets will have likely breached obligations of good faith under employment law and their employment agreements, he said.

“Those routes put the onus on the company to act, and they do almost nothing to help the people on the other side of the bet. It is the people who have bet against the insider who have really lost out in these circumstances – they have been unfairly disadvantaged and likely do not even know about it,” he said.

The unseen losers in prediction markets

Even if a betting platform has terms of use that prohibit insider trading, enforcing those terms depends on knowing that an abuse has occurred.

The platforms themselves are not well equipped to see behind the curtain.

“Realistically, how will the betting platform or other people making bets be aware that this has occurred?” Coffin asked. “Without access to regulatory investigations or corporate records, the operator can rarely distinguish between a savvy punter and someone trading on inside information,” he said.

New Zealand’s gambling legislation is also not fit for purpose to cover these situations, unlike contemporaries overseas. The United Kingdom offers a pointed example. In the 2024 general election, 15 people with advanced knowledge of the election date were alleged to have used this to obtain an unfair advantage in betting markets. The Gambling Commission brought charges of cheating under the Gambling Act 2005, with these cases currently before the courts.

Why New Zealand’s laws lag as markets race ahead

In contrast, New Zealand treats cheating in gambling through a provision in the Gambling Act that is limited to contravening the rules of a game in a casino with intent to obtain a pecuniary advantage.

“That definition offers no real coverage for the use of confidential information in broader prediction markets, including bets on politics or corporate events,” Coffin explained.

Against the backdrop of gambling in prediction markets becoming increasingly sophisticated while our insider trading legislation lags behind, the policy response suggested is blunt. As a stopgap, companies could draft insider trading policies that extend explicitly to betting on corporate events and make clear that any misuse of confidential information will trigger disciplinary and contractual consequences, he explained.

Yet internal policies will never be enough when the real harm is borne by anonymous counterparties and public confidence in markets.

“Updating gambling legislation akin to the United Kingdom would help limit abuse of confidential information more generally, helping to protect participants in prediction markets from others who are exploiting confidential information inappropriately for their personal gain,” Coffin said.

This article was produced in partnership with NZ Lawyer