It's in the name: Prediction market. The point is to predict an outcome, insiders will naturally be better at that than non-insiders.
Though I think where things start to get a bit more insidious is when the "insiders" have access not merely to inside information, but the ability to change the outcome. That type of insider trading should be banned IMO because it works against the purpose of prediction markets as a tool. (Though the extent to which banning that is possible is debatable.)
That isn't very convincing, as the stock market itself is largely a prediction market. People buy stock to bet on future success, whether that manifest in the form of stock price increases, splits, and/or dividends. It's merely a much more narrowly-focused prediction market.
For that very reason, insider knowledge, and especially the ability to influence future outcomes, become the subject of heavy regulation. And, the lack of such regulation for congressional members is also why their net worth tends to skyrocket once entering office.
That's fair. Insofar as the purpose of the stock market is to allocate capital to companies the market predicts are most likely to succeed, you could argue that trading stocks based on insider information should be legal (though not insider trading by those with the ability to influence outcomes).
But I think the way our current system solves this is by forcing companies to disclose important insider information to shareholders all at once, rather than by letting insiders profit by leaking the information through their market transactions. (The one possibly being related to the other, because insiders who could legally profit by keeping information secret rather than disclose it would be incentivised to do so.) I don't think a similar restriction is feasible for prediction markets, because often the thing you're trying to predict is not something that can be legally cajoled into giving up its secrets.
I'd argue that the "purpose" of the stock market is matching investors with companies that want liquidity. Allowing insider trading hurts the purpose by driving away non-insider trading participants, and it does not really help in any way.
With prediction markets, the "purpose" is information discovery, and "insider trading" actually helps (=> via information from insiders).
Disclaimer: I'm somewhat playing devils advocate here, I personally think that prediction markets are for now mostly an ineffective zero-sum game (and legalized gambling with all the drawbacks that brings).
It's easier to define safeguards and the definition of inside information for stock markets than for prediction markets though. There is plenty of information that should ban someone from prediction markets that also wouldn't meet the definition of material non-public information.
that's a very shallow analogy as the stock market has significantly stronger guardrails to curtain insider trading including fines and jail time these companies lack. But even if you were to bring prediction markets under the purview of the FTC, it would still not be a functioning regulatory scheme since the scope of prediction markets is just so much larger - you can bet on anything.
Who cares what they call themselves? They're not prediction markets, they are just gambling on events. The "point" of prediction markets is not an accurate prediction in the same sense that the "point" of sports betting isn't that your bet means the team will win.
Betting markets are actually pretty good at predicting the outcomes of sports games. But you're correct that that's not the point of those markets; accurately predicting the outcome of a sports game has no real-world value, people are just placing bets for their personal entertainment.
Accurately predicting the outcome of a war, election, or other nationally important event though can potentially have immense value.
> Accurately predicting the outcome of a war, election, or other nationally important event though can potentially have immense value.
I don't contest that, but again, you haven't explained why "predictions" is the point of prediction markets. People place bets on things they want to be true as much as things they believe to be true. They can market themselves as whatever they like but no one has made a case that this is any different from sports betting.
It’s different because the prediction markets companies don’t make money on spreads. You aren’t betting against the house. Sports betting, every bet you take has a house edge.
Polymarket, for example, makes money on the data. So it must be worth something because people are paying for that predication data. They don’t take a slice of the winnings.
Platforms like polymarket can be used to bet on the outcome of sporting events. Does the fact that you are betting against another bettor change that from sports betting to a prediction market? If I am playing poker am I still gambling even if the house is just another player in the hand?
Yeah I guess that’s fair, but I wouldn’t say that predictions aren’t the point of the market. My point was more that the predictions must be the point, because people are paying polymarket to get that data.
They don’t make money by taking a spread, they make it by providing information.
And people bet on emotion for sure, but “wisdom of crowds” suggests that generally that will balance out to somewhat accurate odds.
> Robin Hanson, the economist who’s commonly known as the godfather of modern prediction markets, thinks that using inside information to place bets like this is actually necessary for these markets to work—making “insider trading” a feature, not a bug.
> “The point of these markets is to get information, so the only reason you should ever be trading on them is if you think you have some information,” said Hanson, a professor of economics at George Mason University whose academic work inspired the founders of prediction markets Polymarket and Kalshi. “People with more information should trade more and get more money because that's how they get paid for the information they contribute.”
How is it at all a prediction if someone has insider knowledge? That's not a prediction that is knowing the facts. If I'm Trump and decide to capture Maduro tomorrow and then I bet on that happening, what did I predict? If someone close to me who knows my plans bets on it, what did they predict? That I will follow through on my word?
Insiders bring information to a market. Intelligent analysis and prediction also does, but obviously insiders have special information they are incentivized to bring to the market. Most people placing these bets are simply gambling, insiders and analysts at least have rational reasons for placing bets and add information to the market.
If I use a drone to look over a fence to count the amount of inputs and outputs of a factory, and only I know this, it is perfectly legal for me to trade on it. Not insider trading! I'm just a really good information-finder and I'm morally just in how clever I am at finding an edge.
If I work at the company and count the inputs and outputs, and trade on it, I am a morally bankrupt scumbag and I have hurt society and all of the traders in the market.
If you work at the company you have almost certainly signed an agreement not to disclose such information; if you do so, you are violating the agreement. But that isn't insider trading.
If you hold a position of fiduciary responsibility within the company (or gain information from someone who does) that's a different matter. But the analogy there would be hacking into the company to read internal records, not just looking over a fence. in both cases, it's a crime.
The reason insider trading is illegal is because it undermines confidence in the markets by establishing a pattern by which insiders with privileged, secret information leverage it to profit off people who cannot access this information.
It also incentivizes insiders to leverage their position within a company to manipulate the business in order to profit. This also undermines integrity of markets.
Your second example, setting aside all your troll bait inflammatory verbiage about moral bankruptcy, is an illustration of this risk. I don't care if it rises to the level of moral bankruptcy, it is harmful to a capitalist society in a serious way.
Your first example is a depiction of someone leveraging information that anyone can gather. It does not undermine the integrity of markets because it is just an investor acting on publicly-accessible information.
Correct, but they can access the information as soon as it is revealed.
Consider the case where a company knows that the drug they are selling is dangerous but keeps it a secret. Insiders know of the dangers and so bet against the company in the market (obviously this is illegal right now). The insiders make a profit in the short term, and investors also in the short term lose out (which they were going to do anyway, the losses come sooner), but in the long term the secret information is revealed to the benefit of everybody.
I don't see how this is responsive to what I wrote. Are you arguing that insider trading is no big deal? If so, what you're actually saying is "insider trading is no big deal because eventually bad information does reach the public."
But I never said insider trading was bad because it caused people to keep information a secret. You're responding to an argument I didn't make.
I don’t see the harm of insider trading. I would make the trades public and mark someone as an insider. The “cat and mouse” game played now leaves for endless suspicion
Says who?