Prediction markets in the UK; Gambling and insider information

Prediction markets in the UK; Gambling and insider information

Assuming prediction markets are coming to the UK. Assume some will fall under the Gambling Act. Assume some users have "inside information" and make bets using this inside information – what happens?

Betting, like financial markets, assumes (implicitly or explicitly) broadly equal terms for users. If one bettor has private information about an event and places a bet on the basis of this information and makes a gain or avoids a loss, what happens?

Short answer, it's complicated. The Gambling Act 2005 doesn't deal with this straightforwardly. The Act does not create a standalone insider information offence, so there is no "drag-and-drop" reasoning between it and the market abuse framework. However, the Gambling Commission does treat misuse of inside information as potentially falling within the offence of "cheating" under section 42 of the Act (see its policy position paper here).

The medium size answer is the following.

What the Gambling Act 2005 actually says

The Gambling Act 2005 is the principal piece of legislation governing betting and gaming in Great Britain. It established the Gambling Commission as the regulatory authority and created a framework of licensing, consumer protection, and social responsibility obligations.

Section 42 of the Gambling Act 2005 creates the offence of cheating at gambling. A person commits this offence if they cheat at gambling, or if they do anything for the purpose of enabling or assisting another person to cheat at gambling. The Act provides that cheating may consist of actual or attempted deception or interference with the process by which gambling is conducted, or with a person or thing involved in the conduct of gambling. How this applies to prediction markets in the UK has never been tested.

The offence carries a maximum penalty of two years' imprisonment and/or an unlimited fine on conviction on indictment.

Does placing a bet on inside information constitute "Cheating"?

The Act does not define "cheating" exhaustively, and there has been limited case law. The word "cheating" generally implies some form of dishonest conduct that violates the rules of the game.

In its position paper on section 42, the Gambling Commission takes 'misuse of inside information' to mean "taking actions using inside information that would be considered substantially unfair and/or cheating or fraud depending on the context". Inside information is defined in the paper as information which is known by an individual or individuals because of their role in connection with an event and which is not in the public domain and is related to:

• The participation in or likely participation in an event.
• The likely or actual performance in an event that may affect the outcome.
• The likely or actual performance of in-play activity within an event.
• Activity related to a non-sporting event on which bets can be placed.

This is similar to the definition under the market abuse framework – where it has to be information which was not public, is precise and would have an effect on price. The offence of cheating is as close as we can get under the Gambling Act.

So, using genuinely inside information may constitute cheating under the Act; whereas using merely better analysis or public informational advantages generally would not. It captures a sports player knowing she/he will deliberately underperform, such as a tennis player or boxer fixing a match. In general case law looks at sporting events and focuses on the players or athletes placing a bet on their own performance and then creating a false impression in the mind of the bookmaker. There is some of this in recent news headlines, but it's not exactly on point. 

What about the player or athlete telling a friend/contact they will do this, and their friend/contact placing a bet on the basis of this information. Here there is dishonesty in the use of information, but is there deception or interference?

Whatever the final answer on that, the friend or contact who is placing a bet should be worried - section 42 includes "anything for the purpose of enabling or assisting" cheating - which means that a bet placed knowing the athlete is going to fix the match could be an accessory to it in some way. The Commission's policy paper also suggests this is more likely to fall within "misuse of inside information". Still there are a number of open questions such as what happen if the information is not given to the contact but is simply discovered via the contact's employment or discovered unilaterally by them.

Ultimately, this is largely untested ground and there have been only a handful of section 42 cases. Unless the legislation evolves, it may be the Fraud Act 2006 is easier ground for prosecutors to rely upon.

Market manipulation: A separate but related issue

Deliberately manipulating betting markets — for example, placing large bets to shift the odds, then withdrawing or hedging to profit from the price movement — is not explicitly addressed as a standalone offence under the Gambling Act 2005 in the way that financial market manipulation is prohibited under the market abuse framework. The Commission’s position paper on the misuse of inside information also does not deal directly with this type of strategy, but it does frame betting integrity as a "spectrum". Conduct designed to distort odds, particularly where it involves misleading behaviour or exploitation of irregularities, could fall towards the more serious end of that spectrum — for example “awareness of possible criminality” or even “manipulation” depending on the facts.

For example, a person who systematically exploits their ability to move odds — sometimes called "spoofing" in betting contexts — does not neatly fall within section 42, although there are possibilities for it to do so where the conduct involves deception or interference with the betting process.

The Fraud Act 2006 is probably engaged here - section 2 of that Act (fraud by false representation) and section 3 (fraud by failing to disclose information where there is a legal duty to do so) have been used against gamblers engaged in systematic deceptive conduct.

What this means

Watch this space – the law is going to have to evolve.