Spencer Pratt appeared to be a shoo-in to win the June primary in the Los Angeles mayor's race, based on millions of dollars wagered on prediction markets aiming to call the race.

Pratt was an unlikely candidate for mayor. The former reality TV star had never held elective office, but after the Palisades fire destroyed his home, he turned his criticism of the city's response into a campaign rallying cry.

Using prediction markets including Kalshi, Polymarket U.S. and Polymarket International, speculators flocked to the race, which drew more than $47 million in trades, making it the most heavily traded mayoral contest of 2026. On the eve of the June primary, one market gave Pratt a 78% chance of advancing to the November runoff. The prediction markets were wildly off base, and Pratt finished third.

Pratt supporters, though, used the failed speculation to cast doubt on the integrity of the election. That drew a response from the city: "Prediction markets can add to that confusion when people treat their projections as more authoritative than the actual votes being counted," Dean Logan, the registrar-recorder for the Los Angeles County Clerk's Office, said in a statement to CNBC.

Prediction markets' failure to call the election correctly also raised the possibility that markets can be manipulated to make candidates appear to have more support than they really do. Exclusive reporting from CNBC shows that this risk is real.

The dissonance between voter polling, speculation-fueled prediction markets and the actual outcome has grown in importance as election wagers become a prominent feature of elections. Odds and gambling platforms do not use methodologies used by traditional political polling, and therefore are not substitutes for political polls.

Polymarket and Kalshi are the two largest prediction market platforms. They let people speculate on almost anything — from which team will be the 2027 NBA champions to whether the U.S. will confirm that aliens exist.

Already, on these platforms the amount wagered on contracts related to the 2026 congressional elections has more than tripled bets on the 2024 races, according to ACDC. And people are increasingly using the platforms as a source of information. For midterm election markets specifically, Kalshi reports that viewers outnumber actual traders by a 5-to-1 ratio.

Despite the Pratt race being a heavily traded, liquid contract, Kalshi detected and reported on price spikes that occurred during trading on that race in a case study it published in July. A price spike is a temporary but large price jump that can make an outcome look more likely to happen, according to experts. Price spikes can happen for a variety of reasons, such as new information changing trader expectations or a trader buying a large number of contracts, which can drive up contract prices as cheaper ones get bought up.

On May 20, the company said, a trader on Kalshi spent $1.25 million on "Yes" contracts on Pratt becoming LA's next mayor. One of the trades caused the price of contracts on Pratt's victory to jump from 29 cents to 45 cents, suggesting that traders saw his chances of winning rise from 29% to 45%. However, according to Kalshi's case study, within nine seconds, the price reverted to earlier levels and the markets self-corrected.

"You can absolutely guarantee there are rational traders in that market willing to take those trades and bring that price right back down to where it belongs," said Robert DeNault, the head of enforcement at Kalshi, who is tasked with tracking unusual activity on the platform. "And by the end of the day, his price was lower than when it began." But during the LA mayoral race, there were numerous price spikes across Kalshi and Polymarket International that pushed the odds in Pratt's favor, according to an analysis for CNBC by the Anti-Corruption Data Collective, or ACDC, a nonprofit based in Washington, D.C. The group didn't consider trades from Polymarket U.S. in its analysis.

Data that ACDC collected confirms Kalshi's findings. In the case study, Kalshi provided insight through about 30 minutes after the large order was placed. However, the group found that if you expand the time frame to three hours after the spike, the price lands three cents higher and that level is sustained for about two hours. In the long term, the price does correct. But per ACDC's research, the longer a price increase lasts, the greater the risk of that information being interpreted as market sentiment.

And as ACDC's research suggests, election contracts are vulnerable to unusual price spikes — similar to those in the Pratt race.

The group found that of 167 congressional markets across Polymarket International and Kalshi worth more than $100,000, 38 markets — or about 23% — experienced price spikes moving the contract price 30 cents or more.

One example of such a spike was the Kalshi contract on whether Juliana Stratton would be the Democratic nominee for the Senate in Illinois. On March 3, according to ACDC, two purchases stood out as large — the median order was $12 before election day. One buyer spent $5,000 on contracts that favored the longtime public official's candidacy, taking the price from 47 cents to 79 cents.

The price normalized after three seconds, going back down to 47 cents, but about one minute later, it shot back up to 99 cents after $3,000 of additional contracts were purchased. The price eventually sank back to 52 cents — 5 cents more than where it started — meaning a person or persons spent $8,000, and, in the process, drove up the price that made a Stratton victory look more likely.

Two weeks later, Stratton won the Democratic primary. Stratton declined to comment on this story, but a spokesperson from her office pointed CNBC to a poll from Public Policy Polling released on the same day as the price spike. It showed Stratton leading.

In a statement to CNBC, a spokesperson for Kalshi wrote, "As is common on Kalshi, the market corrected quickly to a price near fair value." ACDC said it's impossible to know the motive behind these wagers. While profit could be a factor, it is an imperfect one. On prediction markets, participants can buy and sell contracts valued between $0 and $1, with the price reflecting how likely traders think an event is to happen.

The more expensive a contract, the smaller the potential payout. Winning contracts settle at $1, while losing contracts become worthless. So traders buying in at 99 cents expect to earn only 1 cent if their predicted outcome happens, and transaction fees charged by prediction markets can also eat into that profit.

"If the theory is that prediction markets are accurate because of a price motive, [a lack thereof] begs the question: What type of goal does someone making a trade like that really have for themselves?" said Michelle Kendler-Kretsch, a researcher at ACDC. Influencing election outcomes may be an answer.

Voters were between 10 and 20 percentage points more likely to believe a candidate would win if prediction markets favored the candidate, no matter what the polls reported, according to a new study funded by the Brennan Center for Justice, a New York City-based left-leaning advocacy organization. That survey, which took place in September, included the perspective of 1,994 registered voters.

Data ACDC shared with CNBC also shows shifting the odds is even easier and cheaper in markets where not many wagers are placed. Across 18,000 active congressional markets on Polymarket International, Polymarket U.S., and Kalshi, 88% could have their prices moved by 10 cents with a single wager under $1,000.

Still, Kalshi market outcomes are often correct. "Across U.S. elections since 2024, when Kalshi's markets favored a candidate to win, that candidate went on to win roughly 9 times out of 10," the company wrote in a website post. Further, The Washington Post examined 268 candidates in this year's primaries who received a 70% to 80% chance of winning on Kalshi or Polymarket on any day in the two months before the primary election. Three-quarters of them won.

Kalshi says it's working to assuage election distortion concerns. It added new transparency-centered features to its midterm election markets earlier this month to help users understand how much confidence to place in a contract's odds, including labels for markets with little trading activity and live feeds showing individual trades. Polymarket also rolled out its own election-specific surveillance system "to detect potential attempts to manipulate election markets, distort probabilities, or manufacture apparent market consensus."

Kalshi told CNBC it uses algorithms to generate alerts based on parameters for unusual trading activity, including fishy trading times and volumes as well as price jumps. It's unclear if Kalshi's internal protocols alerted over the Pratt trades; the company didn't respond to CNBC's request for clarity.

Both Kalshi and Polymarket U.S. are governed by the Commodity Futures Trading Commission, or CFTC, an independent federal agency whose rules are designed to prevent market manipulation and insider trading. Trading prices and activity are publicly visible, and at least in the case of Kalshi, its order book is public on derivatives exchanges and people can escalate and flag unusual trades to the exchanges. In addition, Kalshi and Polymarket U.S. collect "know your customer" information including full legal names and Social Security numbers. The outside world, however, has no insight into who is behind each trade.

"I formerly worked at the FBI and in centralized finance off the blockchain," said Shana Bautista, the head of global intelligence and investigations at Polymarket. "If you want to get information on a case or a certain transaction, you have to serve either a subpoena or a search warrant to be able to get that information." In April, Polymarket International announced a partnership with blockchain analytics firm Chainalysis, which helps the blockchain-based platform track suspicious trading on its international platform.

Adam Hart, a senior product manager at Chainalysis, showed CNBC the data the firm collects on each Polymarket trader. Polymarket can, for example, see the number of trades being made, the total value of buys and sells, how much traders are wagering relative to their overall activity, and their total profits and losses.

Hart walked CNBC through an investigation his team conducted in collaboration with Polymarket: the case of Gannon Ken Van Dyke, a U.S. soldier charged with using classified information to bet on the removal of Venezuelan President Nicolas Maduro and the entry of U.S. forces into Venezuela. Van Dyke pleaded not guilty.

Hart said the wallet was flagged because it made unusually profitable bets and never lost. Van Dyke was ultimately identified in part because he did little to conceal his identity: His wallets were funded through cryptocurrency exchanges that require users to verify their identities. Hart said Van Dyke also transferred his approximately $400,000 in winnings to a mainstream U.S. exchange.

Of course, trades that may look suspicious could be the wagers of a sharp speculator or an enthusiastic backer. That was the case of "Theo," the anonymous French whale who made about $85 million on contracts favoring Donald Trump in the 2024 elections. Bubblemaps, an on-chain analytics firm, was one of the platforms to trace Theo's approximately $60 million in wagers across at least 10 Polymarket accounts. Bubblemaps traced the activity to two crypto exchanges' deposit wallets owned by Theo, who said he based his wagers on his own neighbor polling and calls to battleground states.

That internal sleuthing does little to reassure Jared DeMarinis. As the administrator of the Maryland State Board of Elections, DeMarinis is convinced that the only way to protect election integrity is an outright ban on wagering on election outcomes.

In July, he asked the office of the state prosecutor to investigate whether prediction markets violate state laws prohibiting wagering on election outcomes. A few months later, in September, he prohibited certain individuals and election staff, including election judges and members of the state board of elections, from trading in election markets.

"We employ 26,000 election judges that are poll workers," DeMarinis said. "They have access to information right before it's getting tallied officially and counted. They'll know certain things. This is all problematic because it goes to the legitimacy, integrity of the electoral process." More than half of all states have laws making election betting illegal in all or some circumstances, according to the Pew Research Center. Prediction markets argue that the CFTC, not states, has jurisdiction over their contracts because they classify them as swaps, which fall under federal law. The CFTC has backed that argument.

But these laws may not apply to federally regulated prediction markets. New Jersey, backed by dozens of states, has asked the Supreme Court to weigh in on whether the CFTC rules go far enough to counter election concerns and whether the states themselves have additional standing. In the meantime, the prediction markets are only ramping up their election offerings.

"We don't have a lot of information on whether prediction markets are accurate," Kendler-Kretsch said. "When [a trade] doesn't go the way of an election, instead of sowing doubt in prediction markets and their accuracy, it's sowing doubt in the election itself."