This isn't illegal but feels like it should be illegal. You don't see corporate officers trade their stocks right before a big announcement, because there are laws on it.
Other than the fact that polymarket is legally not a stock market, what really is the difference between insider trading on a stock market vs insider trading on polymarket? Does anyone have a good argument for why one should be illegal while the other is legal?
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.
> Does anyone have a good argument for why one should be illegal while the other is legal?
I don't care either way but for the sake of argument:
Stock market is something you can't avoid (ignoring hermits), so an insider trade can ruin your pension fund or other financial wellbeing with you having no way to opt out of the risk, so the government protects you. (This is good!)
Polymarket is more like a bet between friends. You don't have to play but if you do understand it's unregulated and someone can cheat.
In the UK some MPs and police officers put bets on the date of the next general election on the basis of inside information. Apparently you can be prosecuted for cheating in a bet:
"The investigation, initiated in June 2024, focused on individuals suspected of using confidential information - specifically advance knowledge of the proposed election date - to gain an unfair advantage in betting markets. Such actions constitute an offence of cheating under Section 42 of the Gambling Act 2005, a criminal offence."
The purpose of the stock market is to play matchmaker between companies and capital. Insider trading erodes trust of unaffiliated capital owners and thus hurts the purpose.
A prediction market, on the other hand, aims to provide the best possible probabilities on events (arguably), and "insider trading" helps that purpose.
Just the opposite. It's to the 'benefit of the market' to let insiders trade. That is, if you think that the point of a prediction market is to get accurate predictions (and the point of a financial market is to get accurate prices).
However, I agree that they might get rules against this. But not to benefit the market, just because people think this would be proper. Social desirability bias is strong.
In the long run, if participants feel they can't ever win because there's always an insider taking advantage, then participants might leave and that's to the detriment of the market. So it might be in the interest of the market to make sure everyone has a fair enough chance. Finding the right balance here is somewhat of an art.
This is similar to the way all football teams benefit from fair referees and even matches, even if sometimes it means they lose.
Also: the point of an exchange is to make money. Different types of exchanges have different fee structures, but generally their profit is a function of volume, so there primary objective is to attract volume. Since every trade / bet requires two participants, they need to balance the needs of both participants to make it work. Price discovery is a positive side effect of efficient and fair markets, which is why as a society we like them and encourage them, but it isn't what they are trying to achieve except inasmuch as it encourages participation.
> In the long run, if participants feel they can't ever win because there's always an insider taking advantage, then participants might leave and that's to the detriment of the market.
In the US, there's no general rule that protects you against trading against someone with insider information. Mostly what's forbidden is an employee X of company Y trading on her own account; but if X acts on behalf of Y, they can go crazy.
For you on the other side of the trade, it doesn't really matter whether you sell your Standard Oil stock to someone officially acting on behalf of Berkshire Hathaway who knows that next week Warren Buffett will announce that they are going to buy Standard Oil, or whether you are selling your stock to someone who has the same information, but is not officially authorised by Berkshire Hathaway.
Yet, people still trade in the stock market just fine.
I would suggest as a retail investor you shouldn't buy individual stocks anyway: just buy an index fund.
Until fairly recently, there was no rule against insider trading in commodities in the US, and people still traded them.
In any case, your arguments suggest that exchanges should be able to decide whether they want to allow insider trading, and companies should be allowed to decide which exchange they want to list at (so they can indirectly decide whether to allow insider trading). No need for a blanket one-size-fits-none rule.
If you actually want to know 'why' people think so, have a look at all the discussions around insider trading in financial markets. No one is forcing you to buy stocks at gunpoint, either.
(And, yes, there are good arguments in favour of allowing insider trading in all markets, and a few against.)
It's easier to justify stock markets banning insider information because there are ignorant participants through their investment funds who we would like to protect. Why would we protect willing participants betting on arbitrary events? Even if we ban on this one too, should we in general be able to create a market that explicitly allows insider information for some arbitrary thing, insideinformationverywelcomemarket, where everyone is aware it's the main point of the market or shall we just protect these people from themselves?
> Why would we protect willing participants betting on arbitrary events?
Because some information affects the stock market. So Regulation FD already applies, for financial news.
> Even if we ban on this one too
The UK already banned this, see other comment above in this thread.
> insideinformationverywelcomemarket
You might as well as cut out the middleman, don't call it a "market" anymore, and just call it "crowdfunded-will-pay-reward-for-insider-information-website". Or, basically a crowdfunded TMZ. TMZ will pay thousands of dollars for non-financial info on celebs and then publish that news. That that point, you're just describing a slightly classier crowdfunded TMZ.
> Because some information affects the stock market. So Regulation FD already applies, for financial news.
Sure, but that has everything to do with what information you are allowed to make public, not with whether you should be allowed to bet on arbitrary other markets.
> You might as well as cut out the middleman, don't call it a "market" anymore, and just call it "crowdfunded-will-pay-reward-for-insider-information-website". [...]
The commodities markets in the US used to have no prohibition on insider trading until fairly recently. They still called it a market.
Nope, "just placing a bet" is still illegal if you’re trading on material non-public information (MNPI). Even if you don’t disclose anything, U.S. regulators can treat a prediction-market wager as a derivatives trade made with misappropriated confidential info.
Prediction-market contracts are either CFTC or SEC territory. Many "event contracts" are regulated as swaps (CFTC). If a contract references a single security/issuer, then it falls under security-based swap rules (SEC). Either way, trading them with MNPI risks liability under the applicable anti-fraud rules. (CFTC Rule 180.1 is guided by SEC 10b-5 case law on misappropriation.)
The CFTC uses the misappropriation theory: trading while breaching a duty to keep information confidential is prohibited, even if you never "tip" anyone. They’ve brought cases on this theory. CFTC enforcement and guidance explicitly cite misappropriation cases (Ruggles 2016, Motazedi 2015, EOX, etc) as "insider trading" analogs for non stock trading.
> They still called it a market.
I'm saying you can pivot your hypothetical company to a website-that-pays-for-news-like-TMZ. Last time I checked, they don't call TMZ a market.
Yes, as I said there are good arguments for allowing insider trading at least in some circumstances (and some arguments against).
Until fairly recently, there was no rule against insider trading in commodities in the US, and the market worked just fine.
My point in my earlier comment was that your question about 'why?' seemed a bit weird. You can look up the 'why?' relatively easily, even if you don't find it convincing.
Other than the fact that polymarket is legally not a stock market, what really is the difference between insider trading on a stock market vs insider trading on polymarket? Does anyone have a good argument for why one should be illegal while the other is legal?