4 ms·

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 l

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?

lordnacho 1y ago
It's to the benefit of the market to have such rules, so it's likely a matter of time, assuming growth continues.
- eru 1y ago
  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.
  - names_are_hard 1y ago
    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.
    - eru 1y ago
      > 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.
mnx 1y ago
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.
- CaptainOfCoit 1y ago
  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.
  - johnthewise 1y ago
    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.
  - edanm 1y ago
    Why? This net saves people money, because it makes markets reflect reality faster. Other than a vague sense of "fairness", can you articulate why insider trading should be illegal?
    - Fraterkes 1y ago
      It being unfair might dissuade people from using it, that would kinda compromise the goal of helping markets reflect reality
      - 1y ago
ur-whale 1y ago
> This isn't illegal but feels like it should be illegal. Why? Is someone forcing you to place bets at gunpoint?
- eru 1y ago
  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.)
  - johnthewise 1y ago
    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?
    - jychang 1y ago
      > 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.
      - eru 1y ago
        > 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.
eru 1y ago
> You don't see corporate officers trade their stocks right before a big announcement, because there are laws on it. Depends on jurisdiction.
tabular 1y ago
If the goal is accurate predictions, then the market works much better with insider trading like this.
gadders 1y ago
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." https://www.gamblingcommission.gov.uk/news/article/gambling-commission-charges-15-with-general-election-betting-offences https://www.gamblingcommission.gov.uk/news/article/gambling-...
progbits 1y ago
> 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.
myrmidon 1y ago
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.

lordnacho 1y ago

It's to the benefit of the market to have such rules, so it's likely a matter of time, assuming growth continues.

eru 1y ago
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.
- names_are_hard 1y ago
  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.
  - eru 1y ago
    > 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.

mnx 1y ago

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.

CaptainOfCoit 1y ago
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.
- johnthewise 1y ago
  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.
- edanm 1y ago
  Why? This net saves people money, because it makes markets reflect reality faster. Other than a vague sense of "fairness", can you articulate why insider trading should be illegal?
  - Fraterkes 1y ago
    It being unfair might dissuade people from using it, that would kinda compromise the goal of helping markets reflect reality
    - 1y ago

ur-whale 1y ago

> This isn't illegal but feels like it should be illegal. Why? Is someone forcing you to place bets at gunpoint?

eru 1y ago
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.)
- johnthewise 1y ago
  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?
  - jychang 1y ago
    > 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.
    - eru 1y ago
      > 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.

eru 1y ago

> You don't see corporate officers trade their stocks right before a big announcement, because there are laws on it. Depends on jurisdiction.

tabular 1y ago

If the goal is accurate predictions, then the market works much better with insider trading like this.

gadders 1y ago

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." https://www.gamblingcommission.gov.uk/news/article/gambling-commission-charges-15-with-general-election-betting-offences https://www.gamblingcommission.gov.uk/news/article/gambling-...

progbits 1y ago

> 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.

myrmidon 1y ago

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.