When Governments Trade on Secrets
A lot is being made in the media about insider trading on prediction markets like Kalshi and Polymarket, with much of the focus centered on the way government officials have capitalized on classified information. The recent wave of scandals has prompted calls for bans on state and federal officials from engaging in certain types of trading and the markets have responded with intense lobbying efforts. One trader made $553,000 on a bet about Ayatollah Ali Khamenei’s death hours before Israeli bombs killed the Iranian leader. The Department of Justice (DOJ) has charged a Special Forces officer involved in the operation to capture Venezuelan President Nicholas Maduro made a profit of almost $410,000 on material non-public information (MNPI).
Some journalists have made even broader accusations about insider trading on the stock market and commodities exchanges by associates of the Trump Administration, noting a striking pattern of fortuitous investments in the hours leading up to major presidential announcements. And yet for all the shock and horror in the media’s sudden realization that there is corruption in politics, it is hard to move the conversation beyond a rather obvious narrative of public outrage and congressional oversight. That is because it is rather rare to have an example of a soldier engaged in a very close-hold operation to conduct a high-profile operation who is foolish enough to try to profit off his official duties when he clearly does not have the basic skill set to cover his tracks.
Insider trading among government officials does exist, as suggested by several online ticker boards that help you to follow the stock trades of Members of Congress in real time. There are even electronically-traded funds (ETFs) that allow you to create your own investment portfolio indexed to congressional trades on either side of the aisle. But the type of scandal that most reporters are hoping to uncover exists at such a high level, among such an exalted few, most of them having enough sense to leave some plausible deniability in their actions, that their insider trading will never be fully revealed.
But just as our government officials can profit off their access to information, so too can foreign governments.
The question first arose for me some time ago when a personal friend from the Gulf noted that a senior official in the region responsible for a certain type of economic decision-making had been quietly arrested while still in office for unspecified crimes. The issue was not the country, the person, the arrest, or the secrecy of the charges, it was the fact that it had taken place while the official was still in office. As my friend noted at the time, the ruler should have conducted an investigation, removed the minister, and then carried out the arrest. The only reason to publicly shame the individual would be if he had personally profited from his corruption without sharing the spoils with his boss.
That opened a can of worms. This idea of insider trading, and not just insider trading but rather “state-sponsored insider trading,” took hold of me and I couldn’t let it go. I had to ask every expert I knew in the region whether they had ever heard of such a thing before. Of course, nobody had. A lot of people expected that such activity must naturally take place. If you have incredibly powerful policymakers in massively wealthy countries with access to an enormous wealth of information and they are making decisions on a daily basis that could move markets, why wouldn’t they and their friends seek to make a profit on the side? And everyone agreed that to make a profit through insider trading without sharing the revenues with the Great Leader, or at least notifying him, would be the end of your career or possibly even your life.
A friend pointed out that at one point in 2018, as Turkey’s currency plummeted and the United States imposed sanctions and tariffs that threatened to crater the economy, several journalists covering the storyline had privately noted there was a very brief spike in the Turkish stock market. Apparently the spike coincided with a bizarre announcement from President Erdogan that he might consider returning the controversial S-400 air defense systems his country had purchased back to Russia. In the days and months before and after the announcement, Erdogan had repeatedly insisted he would never forego the purchase and he would withstand American pressure for the sake of his country’s independence. But for a brief moment that day, some person(s) quickly profited from Erdogan’s uncharacteristic and short-lived statement that seemed to serve no other political or policy goal. I was told that the journalists hadn’t filed any copy on the matter, because where was the evidence of collusion?
The real question becomes whether foreign heads of state or other very senior policymakers specifically direct their private investment portfolio managers or their sovereign wealth funds to make purchases of specific U.S. stocks immediately prior to their government ministries’ announcing commercial sales or joint ventures with those same American companies. Presumably such senior officials would have the wherewithal to establish shell companies and maintain sufficient banking secrecy within their own borders to either significantly hamper or completely halt any Securities and Exchange Commission (SEC) investigation. Even if discovered, the most they might expect would be a quiet slap on the wrist from a U.S. Administration that would prefer to avoid a diplomatic row that spills over into the media and that would thereby undermine international confidence in the American stock market.
Examples like Vladislav Klyushin are rare. The Russian businessman was arrested in Switzerland and extradited on a U.S. District Attorney’s warrant for using confidential information hacked from American companies’ quarterly filings with the SEC to then make trades on the U.S. stock market in a “hack-to-trade” scheme. And they are also low-hanging fruit. A Russian, evading sanctions, part of a known cyber-criminal network, who does not formally represent the highest levels of the Kremlin. Everyone at the DOJ could pat themselves on the back for that win, at least until Klyushin was released as part of a 2024 Biden-era prisoner swap.
President Trump can make ambivalent statements about how the situation with the Polymarket gamble on Maduro was comparable to baseball legend Pete Rose, in that the only fault would be in betting against your own team. The President is not wrong in the abstract sense that there is a value in our side being motivated and confident as they go out onto the field, so that they can play to win. Since the Supreme Court overturned the Professional and Amateur Sports Protection Act (PASPA) in 2018, there has been a wave of deregulation and greater public acceptance that a lot of fans like to have a little skin in the game. But just as our government officials can profit off their access to information, so too can foreign governments. And their ability to mobilize capital in coordination with decision-making while shielding themselves within their own sovereign boundaries makes them a much greater threat than a single low-level player in Washington on a prediction market.
These are hard questions. Hard to research, but also hard to write. That is because there are serious implications for American foreign relations and the stability of our economy at stake, and those implications go far beyond a simple narrative of public outrage and congressional oversight.
READ MORE:
Leaks, Bureaucracy, and the Battle Over US Foreign Policy
Justice Behind Closed Doors in Massachusetts
The Left Weeps for Ayatollah Khamenei
Joshua Yaphe is a senior fellow at the Center for the National Interest. He was previously a senior analyst for the Arabian Peninsula at the US State Department’s Bureau of Intelligence and Research and visiting faculty at the National Intelligence University. He has a Ph.D. in History from American University in Washington, DC, and is the author of two books. Saudi Arabia and Iraq as Friends and Enemies: Borders, Tribes and a History Shared is available in paperback from the University of Liverpool Press, and Time and Narrative in Intelligence Analysis: A New Framework for the Production of Meaning is available in a free, open-access digital version at the Routledge website.
The opinions and characterizations in this piece are those of the author and do not necessarily represent those of the US government.