Prediction Markets Invite Insider Trading – And It’s A Good Thing, Experts Say – Decrypt

Think of the word “inside trading,” and what comes to mind? Maybe someone in a suit, whispering about a secret new product or an upcoming quarterly earnings report. Maybe there’s a park bench involved, or an envelope, or a lot of whiskey.

That picture is out of date. The explosion of predictive betting markets like Polymarket this year has not only changed the way people make money online – it’s also changed the pool of what, exactly, they have access to. which has extraordinary commercial value. And that’s as it should be, according to one of the country’s leading experts in forecasting markets, Robin Hanson.

It may seem unfair, but “fairness” isn’t the main goal—it’s accuracy, he explains.

“If the point of [prediction] markets is to get accurate information about prices, so you want to allow insiders to trade, even if that discourages other people from betting because that makes prices more accurate,” said the professor of George Mason University. Cancel in conversation. And that’s the priority.

In the world of prediction markets, million dollar secrets are no longer just Wall Street executives; now it is the place of podcasters, crypto workersand social media account managers. Earlier this week, Polymarket gambling guessed the outcome of HBO’s upcoming documentary about the origins of Bitcoin assembled $44 million with wagers.

What if the producer of the film has placed the money, knowing the outcome in advance? Or the person who was there, or the sales executive who saw the preview, or the HBO assistant who heard the right call? Should all these people be held to the same standards as high-powered executives who discuss classified information?

That’s a big question, and one that may get different answers depending on how you answer it.

Hanson said Cancel that the reason insider trading is illegal on Wall Street, for example, is to promote the idea of ​​fairness. If everyday investors believed the stock markets were unfair, they wouldn’t buy stocks—and that would be a huge problem for all the companies involved, not to mention about the American economy.

Prediction markets, however, work differently. They are not there to attract as many participants as possible, Hanson says. They exist to accurately predict future outcomes.

If I worry about an insider trading opportunity, I don’t have the opportunity to fund the market.

But even within the small body of academia devoted to the study of prediction markets, there is disagreement on that point. Eric Zitzewitz, a Dartmouth professor who has studied prediction markets for decades, argues that if a platform like Polymarket allows insider trading, the resulting reputational damage could turn off everyday buyers from to the extent that it can damage the accuracy of the price.

“If I worry about an insider trading opportunity, I don’t have the opportunity to give money to the market,” Zitzewitz said. Cancel. “And the consequences could be a major shift in terms of reducing the accuracy of the market.”

The economist explained that, perhaps paradoxically, prediction markets require a lot of unskilled investors to work. These low-profile investors provide much-needed capital — in other words, the money needed to pay these bets — and scaring them can make the market more successful at predicting the future.

That’s why Thomas Rietz, an expert in predictive marketing based at the University of Iowa, describes the work of a platform like Polymarket as a delicate dance between attracting high- and low-content sellers. High information traders, including insiders, will not come into the market unless the low information traders provide enough money to make a potential profit. Low profile marketers can’t come without hope.

“It’s a balancing act,” Rietz said Cancel.

How are platforms like Polymarket faring when it comes to performing this balancing act? So far, no major insider trading scandals have rocked the stakes listed on the company’s platform. But there isn’t much to give Polymarket users faith that insiders aren’t betting against them.

Polymarket is empty know your customer (KYC), which means that any user can do so anonymously Polygon wallet to make badges on the platform. Therefore it would seem difficult, if not impossible, for the company to know if the HBO assistant was among the thousands of anonymous wallets betting on the HBO documentary market.

A person familiar with Polymarket’s operations who asked not to be identified to speak candidly Cancel that insider trading is “strictly prohibited” according to the company’s terms of service, and that only one instance of such an issue has ever arisen. In that case, the person said, the wallet of the user in question froze within hours.

Polymarket of terms of servicehowever, do not refer to “inside trading,” “inside information,” “inside knowledge,” or any similar language related to insiders or knowledge. special. The above source only pointed to a section of Polymarket’s user agreement that prohibits “action that violates any applicable Law, statute, or regulation regarding the integrity of commercial markets.”

The same source also refused to explain how Polymarket can prevent insider trading if it does not collect identifying information about all its customers.

Some of the possible legal consequences of this state of affairs may be reduced in January 2022, when Polymarket agrees to leave the United States. That month, the company received a $1.4 million from the Commodity Futures Trading Commission (CFTC) for allegedly offering unregistered event-based option contracts. The CFTC said that Polymarket has never registered with the regulator as a designated contract market.

Currently, Polymarket is not available on US-based IP addresses, although most of the company’s leadership resides in New York, and the site’s most popular bets are related to American politics, sports and popular culture. A platform market in the upcoming US presidential election, for example, attracted more than $1.6 billion.

If it were registered and located in the United States, Polymarket would not be subject to the ironclad insider trading rules that govern Wall Street. Those rules are largely enforced by the US Securities and Exchange Commission (SEC), which, by nature, only deals with securities.

Rebecca Fike, a former spokeswoman for the SEC, said: “Traditional insider trading rules, such as those enforced by the SEC, do not apply.” Cancel about Polymarket. “There is no safety link in Polymarket.”

The company will be monitored by the CFTC’s new trade body, which is the only one established in 2018—after the agency received new powers through the Dodd Frank Act.

Not only is the prospect of the CFTC monitoring insider trading new, its ability to predict the betting markets has also not been fully tested. Last month, against the CFTC’s protest, the federal court allowed Kalshi, a US-based prediction market, offers betting on election results, making Kalshi the first prediction market to operate legally under the CFTC’s jurisdiction .

In an effort to avoid future problems in the strange new world of predictive betting markets, Kalshi has tried hard to prevent insider trading on his site by doing something that Polymarket once did do—to list which people are prohibited from participating in every market it offers. Kalshi also requires KYC for all users.

While Dartmouth’s Eric Zitzewitz understands why Kalshi is motivated to send strong signals that it opposes insider trading, he is skeptical about whether such a strategy would ultimately work. how much.

“They might be able to catch some of it,” Zitzewitz said. But they won’t be able to catch it all. To be clear, that may or may not be a problem for Kalshi, legally speaking, as no one knows how the CFTC plans to approach the book issue.

The new crop of prediction market platforms that have emerged this year aren’t just betting sites. Instead they see themselves as nothing more than the future of how truth and harmony will be achieved in the digital age. Shayne Coplan, founder and CEO of Polymarket, has been there accused on his platform both as the future of news and completely reinventing “how ideas and information are shared online.”

But turning every aspect of life into a gambling event will have side effects. One of them would be exposing companies and individuals to unlimited control over potentially large amounts of money, whether they are willing to use that power or not.

Cullen Hoback, the director of the HBO documentary that drew speculation from the $44 million Polymarket bet earlier this week, said he was initially surprised – but happy – to find out how much money was involved in that bet. his film will reveal it. He began eagerly to raise oager on Twitter to sell his film before its release.

Perhaps realizing that some people might have concerns, Hoback later informed his followers that he would not bet on the market, as he already knew the ending of the film.

Why did Hoback decide not to bet on the market? He said Cancel it was not due to fear of legal consequences, or even following a request from HBO. He said, it is a decision made based on personal morals.

Would everyone involved in the film manage their emotions in a responsible way? Hoback said he didn’t know anything.

“We didn’t ask for this market to be created,” the filmmaker said Cancel in response. “I have no control over what anyone who has seen the movie in advance does here.”

He said: “Mostly we are excited about this whole thing.

Additional reporting by André Beganski