Leadership1 distinct publisher3 min readUpdated
Robert DeNault and Wharton's Daniel Taylor argue SONAR-style tools are built for the wrong insider. In prediction markets, the insider can know the contract's answer.
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Robert DeNault, Head of Enforcement at Kalshi, and Daniel Taylor, an accounting professor at Wharton who directs its Forensic Analytics Lab, have published a joint argument that prediction markets have distinctive features which any surveillance system must account for, even as many principles carry over from equities [1][3]. The two write that as volumes rise, the industry's long-term success depends on both established players and new entrants adopting rigorous surveillance [2] - which is a venue's own enforcement side setting a bar in public, and therefore a preview of what examiners and counterparties will ask about.
The comparison they draw is unflattering by design. Equity market surveillance has had 50 years to mature, and its core principles now sit inside systems such as FINRA's SONAR and the SEC's ATLAS platform [4]. Those tools are built to detect illicit trading ahead of market-moving corporate events: when a stock jumps 40% on FDA trial results, the system pulls the accounts that traded shortly beforehand and tests whether that activity departs from their own history [5]. DeNault and Taylor add that two decades of SEC insider-trading cases suggest the agency is good at spotting the "YOLO" pattern, an unusually large out-of-the-money options position taken shortly before news [6].
The structural point is about what an insider can actually know. In equities, almost nobody holds material non-public information about the price itself; they hold information about one of many inputs to it, such as rates, earnings, guidance or executive turnover [7]. So monetisation is indirect, and the rational tactic is to wait until just before the information goes public, because until then the position carries unrelated risk [8]. The authors cite the SEC's hack-to-trade cases: obtaining an earnings release early does not reliably produce a profit [9].
Prediction markets collapse that structure. Contracts resolve against a named metric or a discrete event - the authors list Sweetgreen's quarterly profit margin, DoorDash's quarterly delivery volume, SpaceX's monthly launch count, and whether Pam Bondi or Tulsi Gabbard will step down [10]. Here the inside information can be the outcome itself, meaning whether the contract settles at $0 or $1 [11]. An insider who knows the margin buys the contract written on the margin, with the intervening factors stripped out [12], and the rational strategy is often to trade immediately on learning it [13].
That inversion is the operational problem. A surveillance model calibrated to detect clustering just before an announcement has much less to detect when the profitable trade happens at the moment the information is created, days or weeks earlier [1]. It also drags a new population into scope: people with access to a company's quarterly numbers now sit inside a prediction venue's surveillance perimeter without ever touching that company's stock [2].
Watch three things. Whether other venues publish comparable standards, given that DeNault and Taylor explicitly extend the obligation to new entrants [2]. Whether the venues can show timing models keyed to information creation rather than publication [1]. And whether issuers whose metrics are referenced in listed contracts [10] start treating those contracts as covered instruments in their own conduct policies, because the authors' own logic says the exposure exists whether or not anyone has written it down [2].
Ranked by verification strength, evidence, and original report placement.
In the prediction market setting, the economically rational strategy will often be to trade immediately after learning what the contract outcome will be.
Robert DeNault is the Head of Enforcement at Kalshi, and Daniel Taylor is the Arthur Andersen Professor of Accounting at The Wharton School and Director of the Wharton Forensic Analytics Lab at the University of Pennsylvania.
Over the course of the last year it has become clear that although many principles from equity-market surveillance are applicable, prediction markets have several distinctive features that must be accounted for to ensure any surveillance system operates effectively.
Market surveillance in equities has developed over the past 50 years into a sophisticated and well-established discipline, and its core principles are embodied in systems such as FINRA's SONAR and the SEC's ATLAS surveillance platform.
These tools are designed to detect potentially illicit trading ahead of market-moving corporate events; for example, when a stock moves 40% following an announcement of FDA trial results, they can identify individuals who traded shortly before the event and assess whether their pre-event activity differs meaningfully from their historical trading patterns.
Rarely does anyone possess material non-public information about a stock price itself; instead individuals may possess MNPI about one or more factors that influence but do not solely determine the price, such as Federal Reserve interest-rate decisions, geopolitical developments, earnings announcements, forward guidance and executive turnover.
Evidence-backed comparisons of source perspectives and observed adoption signals. Read the methodology
Which Builder, Operator, and Investor concerns the observed source mix emphasized—not a truth score.
Evidence, demonstrated adoption, hype gap, incentives, and confidence are assessed independently, each on its own current evidence. How these are measured.
Single authoritative memo, mechanism only, no data
Every claim rests on one bylined piece in one publication. The authors are well positioned -- a venue's Head of Enforcement and an academic forensic-analytics director -- and the descriptive baseline (SONAR, ATLAS, pre-event anomaly detection, contract examples) is stated plainly and internally consistent. But the load-bearing argument is economic reasoning, not measurement: no detection rates, no case citations behind the two-decade SEC case review, no alert or investigation data from any prediction venue, and no independent corroboration. The supplied body is also truncated mid-argument in the materiality section.
No deployment or usage evidence
Nothing in the supplied material reports a surveillance system being deployed, a rule being adopted, an investigation or enforcement action being brought, or any volume, alert, or case figure at any prediction venue. The piece prescribes and explains; it discloses no implementation. Adoption is therefore unmeasured rather than low.
Slightly overstated: prescription outruns shown evidence
The source's own language is notably hedged ('may not always be effective', 'surveillance may need to place greater emphasis on ex post analysis') and it explicitly carves out markets where conventional pre-event detection should still work, which keeps the gap small. The modest positive comes from claims that reach past what is shown: an industry-wide dependency on rigorous surveillance asserted with no supporting figures, an SEC detection-capability claim resting on an uncited case review, and a structural detection-gap conclusion presented without any measured detection performance.
Incumbent enforcement chief prescribing industry norms
The lead author runs enforcement at Kalshi, an operating prediction market venue, and the piece argues both that the whole industry -- incumbents and new entrants alike -- must adopt rigorous surveillance and that the mis-specification of inherited equity tooling is a structural property of the product rather than a lapse by any venue. That framing is credibility-building for a venue facing regulatory scrutiny and cost-raising for entrants, and the academic co-author's forensic-analytics lab operates in the same surveillance-analytics space. The venue for publication is a corporate-governance forum that republishes practitioner memos largely as submitted, so there is no independent editorial check evident in the cluster.
Moderate on mechanism, weak on effect size
Confidence is reasonable that the described asymmetry exists -- an insider who can know a resolution outright faces different timing incentives than an equity insider, and the venue's own enforcement lead says so on the record. Confidence is low on magnitude and consequence: how much detection power is actually lost, how often contracts of the vulnerable type list, whether ex post analysis performs better, and whether other venues or regulators agree are all unaddressed, in a single-publisher cluster with a truncated source body and no adoption evidence.
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1 article · August 18, 2026