Prediction markets’ arrival in Canada increases temptation for insider trading, securities experts warn

Betting on the fortunes of Canadian companies isn’t just for shareholders any more.

The recent launch of prediction markets in Canada is creating new ways for people to gamble on various data points that public companies routinely disclose.

Scrolling through Wealthsimple Inc.’s recently launched prediction markets reveals bets about the comparable store sales that Dollarama Inc. DOL-T, Loblaw Cos. Ltd. L-T and Lululemon Athletica Inc. LULU-Q will report for the second quarter; about Air Canada’s AC-T passenger load factor for the quarter; and about Shopify Inc.’s SHOP-T gross merchandise volume for the fiscal year, among others.

“These would be very attractive bets for someone who might have that information ahead of time,” said Gregory Hogan, a partner in the capital markets group at Cassels Brock & Blackwell LLP.

The advent of prediction markets is introducing a new grey zone into Canada’s capital markets, according to securities experts, creating a temptation for insiders to profit from their access to non-public information.

Lawyers caution that Canada’s insider-trading laws were not designed to tackle the misuse of confidential information by users betting on markets such as Wealthsimple Predict or Forecast Contracts, the platform operated by Interactive Brokers Group Inc IBKR-Q.

“The insider-trading laws in Canada were built for a different world. They weren’t built for prediction markets,” said Adam Garetson, a partner at Gowling WLG and the leader of the firm’s blockchain and digital assets group.

Canadian regulators don’t permit prediction-market betting on political or entertainment events. But users of Wealthsimple Predict can place wagers on economic data points such as Bank of Canada rates and home sale statistics, in addition to the many corporate event contracts. Those trying to predict Canadian Tire Corp. Ltd.’s CTC-T comparable store sales for the second quarter could bet on figures ranging from above 2.5 per cent to above a 2.5-per-cent decline. (The actual results, which were released on Thursday, showed the company’s comparable store sales were up 0.7 per cent from last year’s second quarter.)

Wealthsimple’s pivot into risky business reflects young Canadians’ financial nihilism

Some high-profile cases south of the border, where prediction markets have been around longer, offer cautionary tales. In May, authorities accused a Google software engineer of profiting more than US$1.2-million by trading on confidential business information on Polymarket. That case followed charges against an American soldier accused of using classified intelligence to make more than US$400,000 betting on the outcome of a U.S. military operation to capture Nicolás Maduro in Venezuela.

Canada’s insider-trading laws are framed around an insider – someone who has a special relationship with a company – trading in securities issued by that company.

“They don’t map neatly onto event-based contracts, where it’s very different than a company issuing an equity share,” Mr. Garetson said.

However, lawyers say securities regulators could pursue certain legal avenues to prevent people from making bets on event contracts based on non-public information.

“Securities regulators have what’s called a public-interest power – basically a broad power to take action where there’s activity in capital markets that’s contrary to the public interest,” said Evan Thomas, a Toronto-based lawyer advising fintech clients.

“I would expect that a Canadian securities regulator, if they were looking at a case where someone in Canada was using material non-public information to trade in prediction markets, whether or not the insider-trading provision applies, they would say that’s activity contrary to the public interest,” he added.

Wealthsimple declined to provide an interview for this story, but in a recent white paper, it said three layers of surveillance prevent insider trading on its prediction market.

The company is subject to anti-money-laundering laws that require it to know who its clients are and to report suspicious transactions. The futures commission merchant that routes client orders to Kalshi, the exchange that Wealthsimple partnered with for its platform, surveils trading patterns and is obligated to escalate any improper patterns it detects. In addition, Kalshi conducts real-time market monitoring, enforcement and regulatory reporting.

The Canadian Securities Administrators, an umbrella organization made up of provincial and territorial securities regulators, said event contracts can be considered securities, derivatives or both, and anyone trading them must follow applicable rules, including prohibitions against insider trading, market manipulation and other unfair practices.

“Securities regulators will take enforcement action where they have identified a violation, including insider trading or conduct in the capital markets that is contrary to the public interest,” spokesperson Ilana Kelemen said in a statement.

Prediction markets offer a glimpse into the future – and protection from it

Wall Street banks have been modifying employee codes of conduct to include rules around prediction-market betting, according to Reuters.

Employee codes of conduct typically already prohibit misusing a company’s non-public information, Mr. Thomas said. However, companies may wish to update their policies to specifically mention prediction markets, he added. That way, “no one can claim they misunderstood. If it’s explicit, it puts people on notice.”

Royal Bank of Canada RY-T said employees who are subject to the bank’s personal trading policies – those who have access to material non-public information or sensitive information because of their level or role – are barred from placing bets on prediction markets. The ban was communicated through an employee bulletin, a bank spokesperson told The Globe and Mail in an e-mail.

Bank of Nova Scotia’s BNS-T personal trading policy prohibits employees from trading on prediction-market platforms to speculate on financial markets, indexes or companies, a bank spokesperson said.

Bank of Montreal BMO-T said its code of conduct addresses the use of non-public information, including as it relates to the bank and its clients.

Canadian Imperial Bank of Commerce CM-T declined to comment, while Toronto-Dominion Bank TD-T did not respond by publication time to e-mailed questions about their prediction-market policies.

The Globe contacted several of the Canadian companies that were the subjects of recent bets on Wealthsimple Predict.

Dollarama, Loblaw and Air Canada said their existing employee codes prohibit misusing or disclosing confidential information. A spokesperson for Air Canada said the company regularly monitors the development of new trends and expands its code when warranted.

Shopify said it has policies prohibiting its employees from using information obtained through their roles at the company for personal gain.

Canadian Tire and Lululemon did not respond to requests for comment.

The Canadian Investment Regulatory Organization (CIRO) said investment dealers, including those offering prediction markets, are required to have policies and procedures in place to detect improper trading activity.

“If prediction market activity raised insider trading concerns, CIRO’s focus would be on whether the dealer had appropriate controls, supervision, monitoring, and compliance processes in place and whether it met its regulatory obligations,” Ariel Visconti, a spokesperson for the investment industry regulator, said in an e-mail.

Determining whether someone engaged in insider trading, as well as any enforcement action against them, would fall to the provincial securities regulator, she added.

With reports from Jason Kirby