The argument goes, the purpose of prediction markets is not to be fair, it's to provide information. Allowing insider trading benefits that purpose. And I think that's fair - this is not a place to invest your retirement savings, it's essentially gambling.
I kind of feel like abusing the information asymmetry when doing insider trading in a betting market should be illegal regardless if the purpose is to provide information or not, or if it's considered gambling or not. Just like doing so with stocks is illegal today.
The purpose of banning insider trading in markets is not "fairness". The purpose is to encourage participation. We want to promote investment in the stock market by the general public who don't have insider information, because that stimulates the economy by providing capital for productive businesses.
Prediction markets don't provide capital for productive businesses. The only purpose of a prediction market is to get accurate predictions. Insider information makes the predictions more accurate. Unlike the stock market, we don't need to encourage public participation in prediction markets. In fact we might want to discourage it because it's essentially gambling. Therefore, we should definitely not outlaw insider trading in prediction markets.
Participation by the general public is an important part of prediction markets! That's the entire point of the wisdom of the crowd. Before an insider tilts the market in one direction, in the absence of much insider information, prediction market advocates point out that the prediction market will still capture information value that you can't glean from just one source.
If you discourage public participation in prediction markets "oh I will just lose my money to an insider a few hours or days before the final result, so why bother", then the end result is that nobody participates until an insider makes a big bet. Then the market is worthless until the insiders jump in. Is that really what prediction market advocates want?
The other point is that:
> Prediction markets don't provide capital for productive businesses
Is not true. There's more than just capital in terms of cash. There's human capital (employees), brand value... and importantly, information. Which is what prediction markets intend to do in the future: become an information value source for productive businesses.
Money isn't the only unit of value.
Allowing insider trading seems like a nearsighted way to increase volume for prediction markets, at the cost of long term value.
Emperically, we have plenty of participation by the public in prediction markets without a prohibition on insider trading. We don't need to encourage any more.
> Allowing insider trading seems like a nearsighted way to increase volume for prediction markets, at the cost of long term value.
It's exactly the opposite. Banning insider trading in prediction markets would be a nearsighted way to increase volume (by encouraging more public participation) at the cost of long term value (accuracy, because insiders have the accurate information). Prediction markets can only be an "information value source" to the extent that they are accurate.
> Emperically, we have plenty of participation by the public in prediction markets without a prohibition on insider trading.
That's not true. As mentioned in this thread, the UK has laws in general against this (for betting). The USA also already has laws against specifically insider financial disclosures (Regulation FD) for corporations, that also applies to betting on prediction markets (Dirks vs SEC ruling in the general case). I'm not sure if Regulation FD applies to Nobel prizes, though, as that's not regulated by the SEC, and I'm not sure if the USA has general laws on illegal betting. But therefore, I do not think you can claim that "there is no prohibition on insider trading", as that's already clearly mostly illegal and thus already priced in for the public participation in prediction markets.
> It's exactly the opposite. Banning insider trading in prediction markets would be a nearsighted way to increase volume (by encouraging more public participation) at the cost of long term value (accuracy, because insiders have the accurate information).
Again, the current laws already ban insider trading from corporate sources, so the status quo is already what I propose; you don't see insiders trade on predictions like "would OpenAI release GPT-5 in 2025" as that's against the law.
> Prediction markets can only be an "information value source" to the extent that they are accurate.
This is also not true. Bayes Theorem! The information does not need to be fully accurate, just more accurate, enough to update from P(A) to P(A|B) given P(B), where P(B) is the prediction market's price on a certain prediction! That means an inaccurate prediction market can still inform your knowledge updates, if you can derive information from it.
> an inaccurate prediction market can still inform your knowledge updates
I didn't say an inaccurate prediction market is completely worthless. But it is self-evident that an accurate prediction market is a lot more valuable than an inaccurate one.
> the current laws already ban insider trading from corporate sources
Not only are most markets not related to corporations including the most important ones, I don't believe that insiders are actually that discouraged from trading even on corporate markets, and more importantly I don't believe the public believes insiders are prevented from trading. Everyone on Polymarket knows it's the wild west, and yet people still trade plenty.
> I don't believe that insiders are actually that discouraged from trading even on corporate markets, and more importantly I don't believe the public believes insiders are prevented from trading.
Yeah, you're just describing humans behaving irrationally then. That's clearly not rational behavior (which to be fair, is totally expected for humans), which means that even if it's descriptive of the current markets now, that's not actually ideal.
Isn't that the entire point of the prediction market model? You derive the wisdom of the crowd by enabling smarter people who make better educated guesses as predictions (from the same access to information as others) to win out over time. They are incentivized to do this financially, by winning bets.
If markets just becomes "first person to cheat takes all", then there's no incentive to NOT cheat. So you drive away the people who power the prediction market in the absence of information. Over time, this means that the prediction market is just random noise until a leaker publishes news. At that point, you might as well as just skip the middleman and just make a website "LeakNews" where you can directly offer bounties that goes towards a reward paid out to a leaker for news you are interested in.
why? The purpose of the prediction market is not to be fair to market participants, it's to aggregate information regarding an event. There is a public benefit to allowing participants to bet on insider information. It could be even argued there is nothing unfair about it if everyone is free to do it/can anticipate others might have insider info. If we actually limited the market to participants who have insider information(not feasible because we can't verify), that'd be a great public utility. this is the next best thing for all those who don't participate in it. These are specialized markets and we shouldn't rush to 'protect' people who bet on very technical events happening.
