Goldman Sachs has issued a new policy to ban employees from trading on certain prediction markets, as firms across financial services are contemplating how to monitor employee activity in the space.
As first reported by Bloomberg and confirmed by InvestmentNews, employees at Goldman Sachs are now prohibited from placing prediction market bets on event contracts involving specific companies, electoral outcomes, financial market performance, macroeconomic data, and geopolitics. Staff remain allowed to place trades on sports and entertainment prediction markets under Goldman’s policy.
Staff who break Goldman’s rules more than once could face dismissal or have their accounts shut down from prediction markets. Hedge funds Point72 Asset Management and Balyasny Asset Management have taken stricter approaches than Goldman by placing an outright ban on all employee trading from personal accounts on prediction markets.
StarCompliance, a software for monitoring employee trading activity, has partnered with Kalshi to begin offering enterprise-level compliance to firms in financial services for tracking their employee activity across prediction markets.
“We cover mid to large enterprise global financial service firms, buy side and sell side. So broker dealers, asset managers, registered investment advisors, hedge funds, and other service providers,” said Steve Brown, head of business development at StarCompliance. “I can tell you that there's a great deal of interest in monitoring their employee activities.”
Brown explained the prediction markets compliance risk for financial advisors, such as if a client is a company executive who shares material non‑public info to the advisor who then places a prediction market trade based on that info. This would potentially be in violation of the CFTC’s insider trading or misappropriation risk rules.
“If an asset manager, financial advisor, or a banker has material non-public information on Apple or SpaceX, or any other type of event contract that has been written, and they're able to determine is it a yes or is it a no with a degree of certainty, then that's an example of insider trading or misappropriation within the prediction market space,” said Brown. “That is in violation of CFTC regulations, and so that's been the primary concern.”
Adam Phillips, managing director of investments at EP Wealth, oversees the investment committee for the California-based RIA that manages about $45 billion in client assets. While employees must submit personal investment trade requests for pre-approval if they are securities within EP Wealth’s holdings or strategies under consideration, that does not currently extend to prediction markets trading.
“Currently there's no company-wide policy as it relates to prediction markets,” Phillips told InvestmentNews. “I don't have any visibility into whether employees are currently involved in the prediction markets, but my assumption is that some are involved in some ways.”
Schwab, a leading custodian for RIAs including EP Wealth, will offer prediction market trading on the outcome price of the S&P 500 in partnership with Cboe Global Markets.
“It really contradicts our long-term investment thinking,” Phillips said of Schwab’s prediction markets entry. “These are more short-dated instruments, and so for that reason, we'd be unlikely to apply it within client portfolios. But that doesn't mean that we can't make use of them and be an observer from the sidelines.”
While not yet entering client portfolios at EP Wealth, Phillips says that prediction markets can be used as an “additional gauge of retail investor sentiment,” similar to how the RIA monitors various economic surveys on consumer sentiment.
“Because Schwab is one of our custodians, if we were to hypothetically move into Schwab's prediction markets offering, then that would preclude employees from participating, and that would then put it on the restricted list,” added Phillips.
EP Wealth will also be paying attention to activity on prediction markets relating to the midterm elections in November.
“It helps us to understand maybe potential outcomes for this upcoming midterm elections, odds of a democratic sweep for instance in the house and senate,” said Phillips. “If the odds are increasing for [in this example] a democratic sweep, what does that mean for policy, and therefore, what does that mean for our market and economic outlook?”
While some advisors can see the value in monitoring data from prediction markets, Good Life Financial Advisors of NOVA president Josh Strange sees the acceptance of event contracts in financial services as a “horrible idea” and links them closer to being “sheer unadulterated gambling.”
“I do not believe that prediction markets can offer any valuable data on anything regarding economic trends,” said Strange. “We have so many sources of data for economic trends, I don’t see what value prediction markets on a myriad of random events could add.”
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