Prediction markets invite insider trading — and that’s a good thing, experts say

Think of the word “inside trading” and what comes to mind? Maybe someone in a suit, whispering about a mysterious new product or the quarterly earnings report that just dropped. Maybe there's a park bench, or a post, or a lot of whiskey.

That image is now outdated. This year's explosion in the popularity of prediction betting markets like Polymarket has changed not only how people make money online—it's also changed the pool of people who have access to information of extraordinary business value. According to Robin Hanson, one of the leading figures in the prediction markets, this is exactly how it should be.

It may seem unfair, but “fairness” isn't the main goal—accuracy is, he explains.

“If that's the point [prediction] Markets are getting accurate information on the price, then they definitely want to allow insiders to trade, even if this discourages other people from betting, this makes the price more accurate, said the George Mason University professor. Decrypt In an interview. “And that's the priority.”

The multi-million dollar secrets in the world of prediction markets aren't just for Wall Street executives; They are now domain. Podcast books, crypto workersAnd Social media account managers. Earlier this week, Polymarket's bet on the conclusion of an upcoming HBO documentary Bitcoin gathered 44 million dollars in wagers.

What if an editor placed a bet on that movie knowing the outcome beforehand? Or a gaffer on set, or a marketing executive who saw an early screening, or an HBO assistant who heard the right phone call? Should all these people now hold the same standards as high-powered CEOs when discussing private information?

That's a big question, and it can get different answers depending on your approach.

Hansen said. Decrypt The reason insider trading is illegal on Wall Street, for example, is to promote the concept of equity. If everyday investors thought the stock markets weren't fair, they wouldn't buy stocks—and that's a big problem for all companies involved, not to mention the US economy.

Prediction markets, however, operate on a different premise. They don't exist to attract as many participants as possible, says Hansen. They are available to accurately predict future outcomes.

But there is disagreement on that point even within the small academic unit devoted to the study of prediction markets. Eric Zitzwitz, a professor at Dartmouth who has researched prediction markets for decades, says that if a platform like Polymarket allows insider trading, the effect could be to destroy day-to-day speculators in a way that undermines price accuracy.

“If I'm worried about the potential of insider marketing, I'm less likely to market,” Zitzewitz said. Decrypt. “And those effects can be a big deal in terms of reducing the accuracy of the market.”

The economist explained, perhaps on the contrary, that prediction markets require investors to operate without much information. These low-informed investors provide much-needed cash flow—in other words, the money needed to pay off these bets—and scaring them increases the market's efficiency in predicting the future.

That's why Thomas Ritz, another prediction markets expert at the University of Iowa, described the role of platforms like Polymarket as a trade-off between attracting high-information and low-information traders. High-informed traders, including insiders, will not enter the market unless low-informed traders make enough profit. Low data traders don't come without trust.

“It's a balancing act,” Ritz said Decrypt.

How are platforms like Polymarket faring in this balancing act? So far there are no major insider trading scandals with bets listed on the company's platform. But right now, there's not much to give Polymarket users confidence that insiders aren't playing against them.

It does not have a polymarket Know your customer (KYC) requirements, which means any user can anonymously create a Polygon A wallet for betting on the platform. So it seems difficult, if not impossible, for the company to determine whether HBO's assistant is among the thousands of unknown wallets being marketed for HBO's documentary.

A person familiar with Polymarket's operations, who asked not to be named, was told candidly. Decrypt Insider trading is “absolutely prohibited” by the company's terms of service, and only once has such an issue been raised. In that case, the person said, the user in question had a frozen wallet within a few hours.

Polymarket Terms of ServiceBut do not refer to “inside trading”, “inside information”, “inside knowledge” or any similar language relating to insider or special knowledge. The above source refers only to the section of the Polymarket User Agreement that states “Activity that violates any law, rule or regulation relating to the integrity of trading markets”.

The same source declined to explain how Polymarket would prevent insider trading if it did not collect identifying information about all its customers.

Some of the potential legal implications of this scenario may be mitigated when Polymarket agrees to withdraw from the United States in January 2022. That month, the company received one 1.4 million dollars fine It offers event-based options contracts that are not registered with the Commodity Futures Trading Commission (CFTC). According to the CFTC, Polymarket has never been registered by the regulator as a separate contract market.

Polymarket is currently unavailable for US IP addresses, although most of the company's leadership resides in New York, and the site's most popular bets are on US politics, sports and popular culture. For example, the platform market attracted more than $1.6 billion in bets on the upcoming US presidential election.

If it is registered and accessible in the United States, Polymarket is not subject to the iron-clad insider trading rules that govern Wall Street. Those laws are primarily enforced by the US Securities and Exchange Commission (SEC), which naturally only applies to securities.

“As in, the traditional insider trading rules enforced by the SEC certainly don't apply,” said former SEC attorney Rebecca Fike. Decrypt Regarding Polymarket. “There is no collateral relationship with Polymarket.”

The company will instead be overseen by the CFTC's relatively new Insider Trading Task Force. It was created In the year In 2018 – after the agency received new authority through the Dodd-Frank Act.

The CFTC's oversight of insider trading is not only new, but the regulation of prediction betting markets is also completely unproven. Last month, against the CFTC's objections, the federal court It is allowed Kalshi, a US-based prediction market, offers betting on election results, making Kalshi the first legally operating prediction market under CFTC jurisdiction.

To avoid future problems in the newly regulated betting markets, Kalshi has made a sincere attempt to prevent insider trading on its site by doing what Polymarket did not do.List Which individuals are prohibited from participating in each market. Kalshi requires KYC for all users.

While Dartmouth's Eric Zitzewitz understands why Kalshi is motivated to send strong signals against insider trading, he is skeptical of how effective such a policy will ultimately be.

“They might catch some,” Zitzewitz said. But you can't catch them all. To be clear, that may or may not be a problem for Kalshi, legally, no one knows yet how the CFTC will handle the novel case.

The new red-hot prediction market platforms that have emerged this year do not distinguish themselves as gambling outlets. Instead, they see themselves as less than the future of how truth and understanding are achieved in the digital age. Shane Coplan, founder and CEO of Polymarket, has done it before mentioned On his platform as the future of news and as a general innovation in “how to share views and information on the Internet”.

But turning every aspect of life into a gambling event has side effects. One of these will be to expose companies and individuals to disproportionate control over large amounts of capital, whether they are ready to use that power or not.

Cullen Hoback, director of the HBO documentary, which attracted $44 million in bets on Polymarket earlier this week, said he was initially surprised by how much money was being wagered on what the film would reveal. He started eagerly Introducing He took to Twitter to promote the film before its release.

Perhaps aware of some people's concerns, Hoback announced to his followers that he already knew the end of the film and would not play it in the market.

Why did Hoback decide not to bet on the market? he said. Decrypt It wasn't out of fear of legal ramifications or complying with a request from HBO. He said it was a decision taken from a personal sense of morality.

Did everyone involved in the film manage their emotions responsibly? Hoback said. He had no idea.

“We did not ask for this market to be created,” said the filmmaker. Decrypt in turn. “I have no control over what anyone who has already seen the film does here.”

“We had fun with everything,” he said.

Additional reporting by Andrey Begansky