There is a steady drumbeat of news coverage regarding insider trading on prediction markets. The New York Times just published a write-up today about the most recent iteration of this phenomenon (this time involving military strikes in Iran). Predictably some obvious insiders made large bets using information the rest of the world simply did not have.
I wrote about this a few weeks back (and the noise around the topic is only growing louder). We are currently witnessing a collective amnesia regarding why insider trading was made illegal on Wall Street in the first place. Prior to the 1929 crash insiders used their proximity to power to fleece general investors. This led to a profound distrust in the markets in the wake of the crash and a general uproar that then led to the creation of the Securities Exchange Act in the wake of the Great Depression.
I remain entirely unimpressed by the defense that prediction markets should allow insider trading because they are supposedly information aggregators. The argument is that insiders help the market reach a more accurate price faster. This is a polite way of saying the house should be allowed to mark the cards. The reality is that these platforms are gambling sites that have rebranded as oracle-like forecasting tools. When you walk into a casino you generally know the rules and the house does not get to peek at your hand before raising the stakes. Prediction markets currently lack even that basic level of integrity.
The most recent examples of this behavior carry genuine national security risks. When Maduro was taken we saw suspicious betting patterns emerge before the operation was underway. If insiders move markets for military operations then savvy nation states can monitor those shifts and take counteractions. This is not just a matter of losing money, it is a matter of putting lives at risk for a payout. While the Maduro situation prompted Congress to create a bill to try and address it, I suspect this won’t fly in the current administration.
The platforms themselves are starting to feel the heat. If they want to exist in the long term they will need to implement real safeguards. Why should any rational actor use these markets if the game is fundamentally rigged?
It seems the industry has finally found a shred of self-awareness as they recently decided that betting on nuclear detonation was perhaps a step too far. It is a low bar to clear but in the current environment we have to take what we can get.