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    Why Hedge Funds Are Banning Prediction Markets — And Why Wall Street Still Wants In

    Point72 and Balyasny banned employee prediction market trading. Meanwhile, prime brokers are racing to give institutional clients access to Kalshi. Here's what the contradiction reveals about where the industry stands.

    By PredictionMarkets.usMonday, March 23, 20269 min read

    Published March 23, 2026 | Category: Analysis | ~9 min read

    In the span of one week, Wall Street sent two contradictory signals about prediction markets.

    On March 19, 2026, Bloomberg reported that Point72 Asset Management and Balyasny Asset Management had banned their employees from trading on platforms like Kalshi and Polymarket in their personal accounts. Two firms with a combined tens of billions in assets under management decided the risk wasn't worth it.

    On the same day, Clear Street — a prime broker to hedge funds and sophisticated traders — was actively working to clear its first trades on Kalshi, preparing to offer institutional access more broadly.

    So which is it? Is Wall Street walking away from prediction markets, or racing toward them?

    The answer, it turns out, is both. And the split reveals something important about where this industry actually stands.

    The Compliance Problem Is Real

    Point72 and Balyasny aren't banning employee trading because they think prediction markets are a fad. They're banning it because their compliance teams can't figure out how to monitor it properly.

    According to Bloomberg's reporting on March 19, 2026, the core concern is material non-public information (MNPI) and the inability of the platforms themselves to provide the electronic audit trails that large financial firms require for regulatory reporting.

    Here's the logic: a hedge fund analyst covering pharmaceutical companies might know, days before an FDA announcement, which way the approval is likely to go. If that analyst trades a prediction market contract on the FDA outcome, they may have just committed insider trading — even if the prediction market itself lacks the surveillance infrastructure to catch it.

    This isn't a theoretical concern. In the past year alone, Kalshi has opened over 200 insider trading investigations (Kalshi, February 2026), and the CFTC issued an Enforcement Division advisory on insider trading in prediction markets in February 2026 (CFTC Release 9185-26, Feb. 25, 2026), followed by manipulation guidance in March 2026 (CFTC Release 9193-26, Mar. 12, 2026). The enforcement machinery is catching up — but it isn't there yet.

    As Hedgeweek reported, the platforms currently "lack the infrastructure to provide the reliable electronic records the financial firms need, which makes effective monitoring difficult and raises noncompliance risks."

    For a firm like Point72, that gap is unacceptable. One enforcement action costs more than a thousand profitable trades are worth.

    Other firms are handling it differently. JPMorgan Chase requires employees to follow standard personal trading rules. Harris | Oakmark and Ocean Park Asset Management are actively reviewing policies. Goldman Sachs told reporters in March 2026 that while they're monitoring the space, any significant integration would require "further evidence of consistent and reliable data quality."

    The point is that every major firm is wrestling with this, and different risk tolerances are producing different answers.

    Meanwhile, Prime Brokers Are Building the Infrastructure

    The employee trading bans are about retail-facing platforms. The institutional story is happening at a completely different level.

    On March 11, 2026, Bloomberg reported that Clear Street — a prime broker serving hedge funds — is preparing to clear Kalshi trades for institutional clients. Clear Street CEO Ed Tilly confirmed the firm expects to execute its first Kalshi trade this month and roll out broader access later in 2026.

    This matters because institutional access requires a different infrastructure than a retail app. Prime brokers provide the custodial accounts, margin financing, reporting systems, and compliance workflows that hedge funds need to integrate any new instrument. Kalshi operating as a CFTC-regulated Designated Contract Market (DCM) and Derivatives Clearing Organization (DCO) makes this possible — it's the same regulatory structure that governs futures exchanges like CME Group.

    Susquehanna International Group has already gone further, becoming the first official market maker on Kalshi — receiving reduced fees and higher position limits in exchange for providing liquidity. DRW has built out a dedicated prediction markets trading desk with salaries reportedly reaching $200,000 for traders. Quant firms are specifically hiring for prediction market roles, according to Finance Magnates' January 2026 reporting.

    These aren't compliance-averse retail investors. These are professional trading firms building structural positions in the space.

    What Institutional Players Actually Want From Prediction Markets

    A January 2026 study by Crisil Coalition Greenwich, published by InvestmentNews, surveyed U.S. buy-side and sell-side professionals on their views. The findings:

    • 43% of market structure specialists have a favorable view of prediction markets
    • ~60% see prediction market data — prices, implied odds, volume, positioning — as a potentially valuable supplement to traditional market indicators
    • ~17% believe it could generate unique, alpha-driving insights
    • ~20% are skeptical, citing noise over signal concerns

    The study identified three primary institutional use cases:

    1. Speculation and position-taking. Betting on discrete, binary outcomes — Fed rate decisions, election results, regulatory approvals — using highly liquid, capital-efficient contracts.

    2. Macro hedging. Kalshi's Fed rate contracts, for example, allow funds to hedge bond portfolio exposure to rate decisions more directly than traditional interest rate swaps in some scenarios. Boaz Weinstein, founder of Saba Capital Management, has specifically cited event contracts as a tool for "offset[ting] the probability of discrete outcomes" so portfolio managers can take larger positions elsewhere.

    3. Data and signal extraction. Prediction market prices aggregate information from thousands of participants, many of whom have real expertise in specific domains. The resulting probability distributions can serve as leading indicators — often moving before traditional data sources.

    As Jesse Forster of Crisil Coalition Greenwich put it: "By tapping into the 'wisdom of the crowd,' prediction markets promise unique signals about the future." The caveat, he noted, is that "without depth and participation, markets may not clear efficiently enough to produce reliable signals."

    That's the current state: promising, growing, but still building the liquidity required for institutional trust.

    The MNPI Problem: Why This Won't Disappear

    The compliance concerns that drove Point72 and Balyasny's bans aren't going away without platform-level changes.

    The fundamental issue is that prediction markets price outcomes that are often known asymmetrically. Drugs get approved or denied. Economic data gets released. Geopolitical events develop. People with access to early information have enormous advantages in binary outcome markets.

    Traditional equity and options markets have decades of surveillance infrastructure, electronic record-keeping requirements, and broker monitoring systems. Prediction markets are building these systems in real-time.

    Kalshi, as a CFTC-regulated DCM, has the most robust compliance framework among the major U.S. platforms. It has its own market surveillance team, has opened hundreds of insider trading investigations, and cooperates with CFTC enforcement. The February 2026 CFTC Enforcement Advisory (Release 9185-26) specifically addressed insider trading on prediction markets, while the March 2026 manipulation guidance (Release 9193-26) addressed market integrity requirements, signaling that the regulator takes the issue seriously.

    But "we have a compliance team" is different from "we can provide the same audit trail depth as an NYSE-listed equity." The gap is real, and it's exactly what compliance officers at large hedge funds are pointing to.

    The State-Level Wild Card

    There's another layer making institutional adoption complex: the ongoing regulatory battle between federal oversight and state gambling law.

    Kalshi currently operates under a CFTC regulatory framework as a DCM — which, under federal law, should preempt state gambling regulations. The legal argument is that event contracts are federally regulated derivatives, not state-regulated gambling.

    But 13+ states have challenged that position. Nevada, New Jersey, Maryland, Massachusetts, Michigan, Ohio, Connecticut, Tennessee, New York, Utah, Arizona, Iowa, and Illinois all have active litigation against Kalshi. Arizona went further, filing criminal charges against Kalshi for operating an alleged illegal gambling business — charges Kalshi's co-founder Tarek Mansour called a "total overstep" in March 2026.

    For institutional compliance teams, this creates an additional problem: even if a firm successfully manages MNPI risk, they may be exposed to state-level regulatory uncertainty depending on where their employees are located. A firm with offices in multiple litigating states faces a patchwork of potential liability.

    The CFTC comment period on its advance notice of proposed rulemaking (ANPRM) closes April 30, 2026. Whatever rulemaking emerges will substantially shape whether prediction markets remain a gray zone or achieve the regulatory clarity that would enable broader institutional participation.

    Why This Matters for Retail Traders

    You might be wondering why any of this matters if you're just using Kalshi or Polymarket to trade on Fed decisions or March Madness.

    Here's why it matters: institutional participation is what makes prediction market prices accurate.

    When professional traders with real resources are actively participating — analyzing events, taking and hedging positions, providing liquidity — markets become more efficient. The probability prices you see reflect deeper information aggregation. The spreads tighten. The liquidity improves.

    Conversely, if institutional capital sits on the sidelines because of compliance friction, you're left with markets priced primarily by retail participants — which can be noisier, more susceptible to herding, and less reliably calibrated.

    The prime broker buildout, the market-maker programs, the quant firm hiring — all of this is good news for the quality of prediction markets as information tools, even if the individual hedge fund employee trading bans feel like a setback.

    The Platforms Building Toward Institutional Standards

    Different platforms are at different stages of institutional readiness:

    Kalshi ($22B valuation, March 2026) operates as a full CFTC DCM and DCO — the same regulatory structure as traditional futures exchanges. It has market surveillance, official market-maker programs (Susquehanna), and is actively working with prime brokers on institutional access. It earns APY on trader cash balances. The compliance infrastructure is furthest along among the retail-facing platforms.

    Polymarket (via QCX LLC, its CFTC-licensed U.S. entity) began recruiting a Chief Risk Officer in March 2026, partnered with Palantir and TWG AI for market surveillance, and signed a data partnership with MLB. ICE — owner of the NYSE — made a $2 billion investment in Polymarket. The institutional credibility-building is happening fast.

    Interactive Brokers' ForecastEx is the most institutional-native option, built directly into the IB trading infrastructure with the kind of record-keeping and compliance features that institutional clients already expect.

    For retail traders, the practical implication is simple: platforms with stronger compliance infrastructure are more likely to survive regulatory scrutiny, achieve broader adoption, and remain operational long-term. The ones building toward institutional standards are building toward staying.

    FAQ

    Why did Point72 and Balyasny ban employee prediction market trading? Both firms cited compliance concerns, specifically around material non-public information (MNPI) risks and the inability of prediction market platforms to provide the same electronic audit trails required for standard personal trading monitoring. The bans apply to personal accounts, not firm trading.

    Are hedge funds actually trading on prediction markets? Yes — but through firm accounts, not employee personal accounts. Susquehanna is an official market maker on Kalshi. DRW has a dedicated prediction markets desk. Prime brokers like Clear Street are actively building clearance infrastructure for Kalshi institutional access.

    Is Kalshi regulated the same way as a futures exchange? Kalshi operates as a CFTC-regulated Designated Contract Market (DCM) and Derivatives Clearing Organization (DCO) — the same regulatory structure as futures exchanges like CME Group. This federal regulatory basis is the foundation of its argument that state gambling laws don't apply to its products.

    What's the CFTC ANPRM and why does it matter? The CFTC issued an Advance Notice of Proposed Rulemaking (ANPRM) with a comment deadline of April 30, 2026. The rulemaking process will determine how prediction market contracts are formally classified and regulated going forward. The outcome will significantly affect institutional adoption, state litigation outcomes, and platform operations.

    How does institutional participation affect prediction market accuracy? More institutional participation typically improves price accuracy. Professional traders bring more sophisticated information-gathering, larger capital positions, and arbitrage activity that corrects mispricings. Markets with deep institutional participation tend to be better calibrated than those limited to retail traders.

    The Bottom Line

    The hedge fund trading bans make headlines, but they're a symptom, not a verdict. What Wall Street is actually saying is: we want in, but we need the infrastructure to get there properly.

    The prime brokers building Kalshi clearance. The quant firms hiring prediction market traders. The institutional market-makers providing liquidity. The ICE investment in Polymarket. None of that is the behavior of an industry walking away.

    The firms banning employee trading aren't saying prediction markets are illegitimate. They're saying the compliance infrastructure isn't ready for unsupervised personal account access at a firm managing billions in institutional capital. That's a standards problem — one the platforms are actively addressing.

    For the retail trader, the implication is to keep an eye on regulatory developments, particularly the CFTC ANPRM outcome and the state litigation calendar through 2026. Those developments will determine whether institutional capital floods in — and what it does to the quality of the markets you're already trading.

    Explore current market prices and platform comparisons at predictionmarkets.us.

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