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Discussion (138 Comments)Read Original on HackerNews
If things like Kalshi and Polymarket are prediction markets, then, at least as far as the intrinsic concerns of the market itself are concerned, insider trading is a good thing; literally part of the point.
If they are instead how they function today, then insider trading is a game-breaking fairness issue, like having a device to read your opponents cards in a poker game, and then they're a real problem.
You can tell what these businesses think their platforms are for by how they handle these issues.
In every other case you get worse predictions. Since those who are predicting have to now construct their bets such that they know they can always get run over by an insider. So in the general case it reduces the ability of the predictors to push the market in the right direction, because they always have to risk manage the fact that someone out there might run them over with insider information.
If you're approaching a market with hard facts, detailed comparisons and solid evidence; while I'm trading in the same market based on vibes and intuition, surely it's expected that your returns would be better, and mine worse?
"When a measure becomes a target, it ceases to be a good measure"
https://en.wikipedia.org/wiki/Goodhart%27s_law
Insiders can change the facts.
Perfect example from today. Allbirds just announced that they're going all in on AI infra, skyrocketing the stock. Had I bought a million dollars worth of Allbirds yesterday, everyone would think I'm an idiot. But now, they would think I have insider information and would no longer want to participate because it would make no sense to buy Allbirds yesterday unless I knew the announcement was coming.
Yes, and furthermore even if you’re one of those people who think insider trading in prediction markets is a good thing [1] that doesn’t somehow make it not illegal. The DoJ seems to be pursuing the theory that it constitutes wire fraud, which since “everything is wire fraud”, seems possible.[2] The CFTC has also claimed jurisdiction, which isn’t surprising since it claims jurisdiction over pretty much everything. If true this would mean some of the commodities trading regulations could be used as well, although insider trading rules in the US around commodities are generally less stringent than say for equities. In Europe I’m pretty confident that the EU market abuse regulations would cover insider trading in prediction markets, and make insider trading market abuse as it would constitute trading on material non-public price sensitive information. (European insider trading rules are stricter than the US in general).
[1] the standard argument in favour of this is not one I agree with, but people say that the benefit is that the inside information is revealed by people acting on it in the market and that this therefore benefits the non-insiders. How much you buy into this idea depends on how much you feel that non-insiders benefit from paying insiders for this more accurate price.
[2] https://www.freshfields.com/en/our-thinking/blogs/a-fresh-ta...
Sports betting is so profitable for prediction markets because they're mostly unsophisticated retail flow making lots and lots of trades, giving the platforms commission. If an insider just pushes market prices in their direction the platforms are going to lose on volume.
The average person does not do this. People trade individual stocks all the time, despite every other market participant (banks, hedge funds, etc.) having better information and technology.
It's why institutions like Citadel pay for retail order flow. They know that retail traders don't have an edge and, if anything, often end up being negative signal.
That depends on what the effects are.
Suppose that predicting things well requires both information and analysis. Early access to information is therefore a competitive advantage: Even if you're not as good at analysis, having the information before anyone else and then getting the analysis right 65% of the time is more often than not going to let you beat the people who get the analysis right 85% of the time once they have the information. Which is to say, it will make it less profitable for the people who are better at analysis to participate in the market, and then fewer of them will.
So the question is, what do you want? An answer which is right 65% of the time slightly sooner, or an answer which is right 85% of the time slightly later? It's valid to want the second one.
You can disagree with the libertarian argument, but I don't see how you can say that Polymarket et al. are something other than a prediction market. Can you explain where you see the difference?
So if a market is trying to maintain a veneer of fairness it’s just using a prediction market as cover and is something else.
If you're being that puritan about the definition, then having a "real" prediction market is completely impossible. Because actors like the DOJ do not wait for a statement by the Kalshi CEO to bring charges. And rational actors will know and anticipate that, and hence preemptively comply. So you never get the unfettered version of a prediction market.
I don't think it makes sense to be that puritan about a definition that the thing it's trying to define becomes an impossibility. Polymarket, Kalshi et al are clearly prediction markets in the messy reality that we live in, and we're figuring out as we go what the legal reality of a real-world prediction market is and should be.
I'd like regulations to cut into that too, so the market isn't just a weird "Did trump tweet something deranged today?"
Prediction markets don't have any "natural" reason like that for excluding insider trading. It's just "game designers" crying their hearts out when someone ruins their game by having an advantage.
The employee could not be an insider if his employer did not exists because of a lack of rules against him trading. The prediction market not existing would not make the insider any less of an insider (we are not tking about people inside the prediction market maker!)
Corporate employees abusing trust are doing it equivalently whether they trade securities or place bets. Government employees, similarly, don’t personally own the country’s data.
In a minority of cases, the information is one’s own, e.g. bets on how many times a person says a word. But most of the time, there is a breach of trust.
But the crime the article is talking about isn't "abusing trust", it's insider trading. Insider trading is defined in a specific way. For one, as far as I understand it, it must involve securities.
So now it's public servants military power, congressional power, and they look to enrich themselves with making (or lobbying for) decisions which affect the outcome of a bet.
You could imagine an army general that lobbies for the bombing of Iran knowing the president has his ear, and then bets on the bombing of Iran by March 2026.
I can think of a few very good reasons you would want to prohibit insider trading on prediction markets. Betting on war outcomes; being incentivised to commit war crimes or throw vital operational goals for financial gain. Wagering on public figures' jobs; being incentivised to harm them.
"As a general matter, DCMs are reminded that section 5c(c)(5)(C) of the CEA provides that the Commission may determine that an event contract is contrary to the public interest if the contract involves, among other things, assassination, war, or terrorism."
The guidelines are at https://www.cftc.gov/csl/26-08/download
Corporations depend on controlling the compensation to their employees in order to incentivize them to produce benefit to the corporation. If there is an uncontrolled route to compensation via a prediction market, then the corporation loses its ability to trade compensation for alignment with its objectives.
> The prediction market not existing would not make the insider any less of an insider
Correct, but the prediction market existing makes the insider less of an employee. (Actually, the prediction market not existing would make the insider more of an insider, in that if insider benefit via prediction markets is unregulated, corporations will be forced to limit the information and authority of its employees.)
No, they have a different reason. Consider the consequences of a sufficiently large prediction market bet on whether or not <head of state> will be assassinated this year.
Consider also the consequences of insiders and decisionmakers having an immediate financial incentive to take the other side of a bet whose outcome they control.
There is a RFC on Bitcoin talk from 2011 https://bitcointalk.org/index.php?topic=26350.0
Prediction markets can only do sports gambling (the vast majority of their volume) because they self-certify under the CFTC. The CFTC doesn't have the same standards of "insider trading" as the stock market, because insider trading is the entire point of business at the CFTC!
If you're trading, like, oil futures or wheat futures or whatever, you are likely doing so specifically because you have inside information about your business needs or production that you want to hedge.
I understand why people are mad about gambling versus someone who has insider information, but under current US law I'm not sure that there is a case to be made.
Insider trading, in the U.S., is not legally about fairness but about theft. A firm hedging its own positions is using its information for its own purposes. A federal employee trading on what they heard is abusing the trust placed in them by the American people.
See United States v. Blaszczak.
It may be abuse of trust but that's not automatically a crime.
Sports betting is still illegal in 11 states. They can only do what they’re doing because of legislation and enforcement lag.
> The CFTC doesn't have the same standards of "insider trading" as the stock market, because insider trading is the entire point of business at the CFTC!
True to some extent, but it’s still illegal to use non-public information gained from your firm to trade on personal accounts.
Am I misunderstanding? It seems like two different statements he always conflates.
If it becomes a federal crime at some point, it will become illegal from that point — you can't prosecute people for acts committed before they were crimes.
The only way that this could be a federal crime right now is if the government starts prosecuting it under existing laws without any changes. I don't see that as likely.
Nobody in this administration is going to be prosecuted no matter who is in power.
https://archive.is/TpLqO
> The only way that this could be a federal crime right now is if the government starts prosecuting it under existing laws without any changes. I don't see that as likely.
Fully agree, especially since Kalshi just caught one of the editors of MrBeast's videos red handed (he was betting on the "What words will MrBeast say in his next video" market with 100% accuracy) and while Kalshi banned the guy the DOJ has shown 0 interest in doing anything with that.
Don't assume safety.
Edit - was curious:
https://en.wikipedia.org/wiki/Ex_post_facto_law
So maybe not?
I'd love a judicial scholar's input.
The caveat I added to my initial comment that you also mentioned was that they could try to find a relevant existing law and retrofit it, e.g. general securities laws, and say that this is a securities market and so this has always been illegal — but it's very unlikely and I doubt it would work. Far, far more likely that we pass explicit laws about this.
That way lies madness.
If the govt could do that, they could arrest anyone, anytime simply by making whatever they did yesterday retroactively illegal.
I think there is still the debate to be had whether prediction market enable too much criminal activity and insider trading compared to traditional stock markets and therefore need to be limited for pragmatic reasons (i.e. the legal system can't keep up), but that's a different discussion.
If there are any prosecutions, it won't be anyone in or connected to the administration. Even if these groups weren't in bed together, the fact that the administration has obviously been engaging in insider trading, and the DoJ hasn't done anything about it, makes it clear nothing will happen to them in the future either. The door to the vault is open and they're casually walking out with the public's money falling out their pockets.
Short, casual reads
- https://jamaalglenn.substack.com/p/prediction-markets-were-d...
- https://money.com/prediction-markets-insider-trading/
More academic?
- https://mason.gmu.edu/~rhanson/insiderbet.pdf
AND
- https://www.youtube.com/watch?v=4yZKGbq1YmA
Discussion on possible solutions that references the academic view
- https://www.dopaminemarkets.com/p/how-to-solve-insider-tradi...
We have a situation where selective prosecution is used to command loyalty while the ringleader has been immunized from any kind of legal consequences by the Supreme Court, 6 of whom were appointed by said ringleader. Pardons are pretty openly sold now. It's cheaper to rip off the government then pay a fraction for a pardon, erasing any fine or repayment.
I bet there are lower level staffers who are profiting off inside information on prediction markets. Maybe some will be made an example of. I won't hold my breath.
But all the big insider trading is occurring in securities markets, particularly with oil futures and SPY futures. It's reached the point where no professionals trust the futre oil prices at all and and the physical oil prices differ from the future price by as much as $60/barrel. We've had $1b+ bets on SPY futures minutes before market-changing news. We don't know for sure who's doing this but my guess is that it's at the highest levels of the administration.
For example, given Nancy Pelosi’s effectiveness as an investor, she was effectively a highly successful day trader with a side hustle as a representative of her constituents.
Framing this as a Left v Right, is at best, naive.
[1] https://www.citizen.org/article/biden-doj-2024-corporate-cri...
Just because there is less reports of corruption in the past by dems doesn't change anything. Corruption extends beyond parties, its not a political problem. Its a human problem.
I don't expect to see much change when the dems come back into power, albeit, it be less apparent and of a different nature, I.E more indiscriminate surveillance and less racial profiling ..
There is some kind of cultural thing going on that transcends the party's IMHO that's keeping this problem going.
At most some low-level flunkie will get named and slapped on the wrist.
So like, which is it, is insider trading expected, or are these just gambling sites that should be illegal in many jurisdictions?
Matt Levine has a good take on this. His informal, distilled definition is essentially:
- There is a time gap where insiders know something material and the public does not.
- Someone with access to that material nonpublic information, who is not supposed to use it for personal gain, trades on it anyway.
- That conduct is treated by courts as a deceptive scheme against the less‑informed trading counterparty and against the information’s rightful “owner.”
In other words - you profit at another person's expense (e.g. stealing) because you have information and the other person doesn't.
Two scenarios:
(1) a US Naval Officer knows about a strike 24 hours before it happens and places a bet against someone who doesn't have knowledge about the strike.
(2) Neither a US Naval Officer knows about a strike 24 hours before it happens and someone who doesn't have knowledge about the strike do nothing.
Scenario 1 is (or should be) illegal because the officer is using the information for personal gain, when the information was explicitly given to them for national defense reasons (thus violating the rightful owner clause).
So now who are the non-expert outsiders and why would they bet? Outsiders who think they are experts but are wrong.
If you're asking about why prediction markets fall under the CFTC, this is actively evolving but generally prediction markets are considered to be under the CFTC because they can be used to hedge against events.
For example if you're trying to do business in Oman but you're worried about Iran tensions spilling over, you could take a Yes position on an Iran conflict bet as a hedge. You may lose business but can make some of it up in the hedge.
"Gambling" the concept legally is very complicated and has a lot to be understood, so I'd suggest doing some searching or LLM asking if you want an intro on philosophical definitions or the legal landscape.
No. Their defense is that they are a gamified platform for futures contracts and hence should fall under CFTC regulation.
The CFTC also cracks down on insider trading, but it took time for them to write regulations to catch up with prediction markets.
It is now a priority [0] and they have just started a paid whistleblower [1] programs specifically to catch insider traders within prediction markets.
[0] - https://www.lw.com/en/insights/new-cftc-enforcement-director...
[1] - https://www.whistleblower.gov/whistleblower-alerts/Insider_T...
I find prediction markets to be interesting on two fronts:
1) They like a really good way to determine the probability of something happening, which is interesting for events like elections
2) It provides an avenue for smart bettors to take advantage and sharpen their skill, whereas they get severely limited or banned from traditional sports books
However, it seems like all incentive structures for the markets and consumer behavior will steer these things to degenerate gambling.
N.B. it becomes a bit frustrating to talk about financial and regulatory things on this site because the level of knowledge is generally "I read some articles on social media about markets" level.
That might be the defense. They are inherently designed to leverage insider trading though. I made a top level comment with links/resources that argues why.
But sometimes the answer is more difficult than it seems. Is a mid level military officer an insider? If you overheard a conversation on Capitol Hill are you an insider?
Second, the majority of prediction markets are predicting utterly mundane things like sports. The tiny number of news grabbing markets are not representative.
Why should my tax dollars be spent on helping a bookie run their gambling business? Insider trading laws and prosecution in the financial markets makes sense, because the fair and impartial enforcement helps all of our economy, and allows capital to do its job investing in productive ventures.
These prediction markets are not that. They aren’t sources of investment for a productive enterprise, it is pure gambling.
Why should the US government spend money making sure people can gamble? If people want their gambling to be fair, they can pay for their own enforcement.
I like the idea of insider trading running rampant on these platforms. Once people realize that the other side of their bet knows the outcomes in advance, maybe they will stop betting their money on these platforms and they can just die.
I mean, current laws do exactly this. The FBI has done investigations for major sports betting sites related to players throwing or fixing games, etc. If you commit fraud on a sportsbook you absolutely can go to jail.