4 ms·

This issue reveals the gap between the prediction market premise and what these things actually are, which is: unregulated prop gambling venues. If things like

by tptacek 7mo ago

This issue reveals the gap between the prediction market premise and what these things actually are, which is: unregulated prop gambling venues. 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.

RobRivera 7mo ago
Courts have ruled that these markets are regulated under the CFTC. So they are regulated. Now as to whether it is properly regulated, thats a different matter.
Traster 7mo ago
Even if you buy the idea that Kalshi is a prediction market whose mechanism is gambling but whose product is accurate predictions, you don't have to buy the idea that insider trading is a good thing. Yes, in the rare occasion there exists someone with (a) insider information (b) confidence their actions won't impact their insider position and (c) access to capital - then you get extremely accurate predictions. 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.
- tyre 7mo ago
  > Since those who are predicting have to now construct their bets such that they know they can always get run over by an insider. 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.
  - Karrot_Kream 7mo ago
    No but sophisticated traders will also get stomped by this. Just because you're a sharp oil trading shop doesn't mean you can combat an insider who knows when Brent is about to spike in price due to insider knowledge.
- Karrot_Kream 7mo ago
  If an insider with large amounts of capital makes a big trade, they also end up discouraging other trades. Once you see a huge position taken, LPs are going to scale back their liquidity in other positions to manage risk that the insider is going to stomp them. Any trader monitoring position sizes is going to probably scale back their trading. All of this contributes to less trading and less commission on these markets. 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.
- michaelt 7mo ago
  If people with more information profit at the expense of people with less information, isn't that exactly how things are supposed to work? 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?
  - throwaway173738 7mo ago
    If you’re betting with a friend that they won’t have chicken for dinner, what’s to stop them from having chicken for dinner? What if you bet with a complete stranger who also took the reverse of that bet from your friend?
    - lotsofpulp 7mo ago
      Nothing, that is why you quickly learn to not make stupid bets like that. If you don’t learn, then I guess survival of the fittest and all that.
  - knowsuchagency 7mo ago
    Short answer, no. If you're betting on an outcome that can be controlled by an individual or small group, the incentive is for them to game the system by doing the OPPOSITE of what the prediction is so as to make the most money. "When a measure becomes a target, it ceases to be a good measure" https://en.wikipedia.org/wiki/Goodhart%27s_law https://en.wikipedia.org/wiki/Goodhart%27s_law
    - SilasX 7mo ago
      Goodhart's law does not cleanly apply here, because the group cares about more than making money, and would bear all the costs of not doing (what observers regard as) being in their interest -- both in that case, and whether potential counterparties regard it as being predictable enough to make reliable long-term agreements with. To illustrate with an example, your point is like saying that if we had a prediction market for "Will the United States cede Texas to Mexico in 2026?", then the US government would give up Texas just to get that sweet sweet prediction market payoff. I would agree with a smaller point, that an org would accept minor tweaks it doesn't care about in order to game a market, but this just means it can tolerate being unpredictable about lower-order bits of its decisions. You see that in cases like Trevor Noah making a minor change to a speech to influence a particular bet.
- tptacek 7mo ago
  You can see all across the responses here the encoded premise that the point of a prediction market is to enable people to profit from making accurate predictions. No. The point is for the price to be accurate; for the market to make an accurate prediction. That someone with a P1 prediction can roll over people with less confidence is a feature.
- stouset 7mo ago
  Not just insider information, but insider access. If the outcome of some prop bet is under the control of a handful of people, those people can trivially conspire to produce whatever outcome is most profitable to them.
  - tptacek 7mo ago
    If the outcome of a prop bet really is fully controlled by insiders, so that those insiders are making decisions based on betting outcomes, then allowing that betting to occur seems antisocial and counterproductive to begin with. This is another problem with the Polymarket/Kalshi species of "prediction market".
    - wutwutwat 7mo ago
      > This is another problem It is insider trading, the thing everyone here is talking about
    - AnthonyMouse 7mo ago
      The problem is it's pretty hard to tell ahead of time whether that's what happens. Suppose some large private company has to decide whether they're going to build a new facility in city A or city B. This is useful information for all kinds of reasons. If you're a vendor then you need to start making preparations to set up shop in the city where your big customer is moving etc. The company's analysis shows it would derive a $10M advantage from building in city A. The prediction market is correctly leaning that way. If there are only enough counterparties that someone who now bets on city B and wins would make $5M, everything works the way it should and the company goes with city A. But if there are enough counterparties that a winning bet on city B would net you $25M then the company can place the bet, eat the $10M loss by choosing city B and come out $15M ahead. But the $10M number isn't public. It's essentially the thing you wanted the market to predict and it could be arbitrarily larger or smaller than that. So how are you supposed to know if the prediction market will be predicting the result or determining it?
      - tptacek 7mo ago
- seanhunter 7mo ago
  > Even if you buy the idea that Kalshi is a prediction market whose mechanism is gambling but whose product is accurate predictions, you don't have to buy the idea that insider trading is a good thing. 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-take/regulating-insider-trading-on-prediction-markets-102mp8l https://www.freshfields.com/en/our-thinking/blogs/a-fresh-ta...
c7b 7mo ago
Where do you see a difference? Like you said, there is a libertarian argument that can be made for why insider trading is desirable. If the bet is easily manipulable, like how many times someone will visit a place, then the rational response is for others not to bet on that market. The same argument still holds. 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?
- kasey_junk 7mo ago
  It’s not a libertarian argument for prediction markets that they should have insider trading, it’s the point of the exercise. The way they work is to incentivize people with knowledge to externalize the knowledge to the market. The concept of fairness doesn’t even make sense in that context. 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.
  - c7b 7mo ago
    So the difference between a theoretically pure prediction market and Kalshi is ... this interview? The CEO saying that he thinks others, who do not answer to him in any way, will be doing something to enforce some notion of fairness. 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.
    - wmorgan 7mo ago
      Kalshi is in fact more strict, both defining and punishing insider trading, than CFTC/DOJ. Kalshi is perfectly happy to hand out bans and fines for activity the government doesn't care about. Every Kalshi market has a button on it, "report insider trading" which I'm sure is clicked a zillion times a day by gamblers who are upset they lost. The reason they do these things is that their first priority is to keep the gamblers happy, and the gamblers hate to think they got cheated. This just gestures at the meta-problem with prediction markets, who pays for the alpha? With stocks, companies generate returns to capital. With commodities, there are buyers and sellers of the underlying. But there is very little economic usefulness about most prediction markets, especially by volume. The only way to get enough users to justify the effort to figure out accurate prices, is to turn it into an entertainment product. And in an entertainment product, if the customer doesn't like X, then you crack down on X.
cyanydeez 7mo ago
Your surmise cuts both ways though; much of the stockmarket is fundamentally doing the same thing. It's just the prop bet is a normalized white collar activity. I'd like regulations to cut into that too, so the market isn't just a weird "Did trump tweet something deranged today?"
- tptacek 7mo ago
  Fairness isn't the justification for insider trading enforcement in the stock market, either.
AnthonyMouse 7mo ago
> 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. 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.
- tptacek 7mo ago
  At the point where you're arguing that it's better for a prediction market's prices to be less accurate, I think we've departed the original premise.
  - AnthonyMouse 7mo ago
    You're predicting something which is happening in six months but is affected by data which is being published today. Do you want a more accurate price that comes in the afternoon, or a less accurate price that comes in the morning and then stays less accurate for months because the insiders ate too much of the expected profit margin to justify more expensive analysis?
    - tptacek 7mo ago
      I don't understand how your analysis works. How are you proposing people who are right early get run over by people who are right with certainty later?
      - AnthonyMouse 7mo ago
deleted 7mo ago
[deleted]

by tptacek 7mo ago

RobRivera 7mo ago

Courts have ruled that these markets are regulated under the CFTC. So they are regulated. Now as to whether it is properly regulated, thats a different matter.

Traster 7mo ago

Even if you buy the idea that Kalshi is a prediction market whose mechanism is gambling but whose product is accurate predictions, you don't have to buy the idea that insider trading is a good thing. Yes, in the rare occasion there exists someone with (a) insider information (b) confidence their actions won't impact their insider position and (c) access to capital - then you get extremely accurate predictions. 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.

tyre 7mo ago
> Since those who are predicting have to now construct their bets such that they know they can always get run over by an insider. 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.
- Karrot_Kream 7mo ago
  No but sophisticated traders will also get stomped by this. Just because you're a sharp oil trading shop doesn't mean you can combat an insider who knows when Brent is about to spike in price due to insider knowledge.
Karrot_Kream 7mo ago
If an insider with large amounts of capital makes a big trade, they also end up discouraging other trades. Once you see a huge position taken, LPs are going to scale back their liquidity in other positions to manage risk that the insider is going to stomp them. Any trader monitoring position sizes is going to probably scale back their trading. All of this contributes to less trading and less commission on these markets. 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.
michaelt 7mo ago
If people with more information profit at the expense of people with less information, isn't that exactly how things are supposed to work? 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?
- throwaway173738 7mo ago
  If you’re betting with a friend that they won’t have chicken for dinner, what’s to stop them from having chicken for dinner? What if you bet with a complete stranger who also took the reverse of that bet from your friend?
  - lotsofpulp 7mo ago
    Nothing, that is why you quickly learn to not make stupid bets like that. If you don’t learn, then I guess survival of the fittest and all that.
- knowsuchagency 7mo ago
  Short answer, no. If you're betting on an outcome that can be controlled by an individual or small group, the incentive is for them to game the system by doing the OPPOSITE of what the prediction is so as to make the most money. "When a measure becomes a target, it ceases to be a good measure" https://en.wikipedia.org/wiki/Goodhart%27s_law https://en.wikipedia.org/wiki/Goodhart%27s_law
  - SilasX 7mo ago
    Goodhart's law does not cleanly apply here, because the group cares about more than making money, and would bear all the costs of not doing (what observers regard as) being in their interest -- both in that case, and whether potential counterparties regard it as being predictable enough to make reliable long-term agreements with. To illustrate with an example, your point is like saying that if we had a prediction market for "Will the United States cede Texas to Mexico in 2026?", then the US government would give up Texas just to get that sweet sweet prediction market payoff. I would agree with a smaller point, that an org would accept minor tweaks it doesn't care about in order to game a market, but this just means it can tolerate being unpredictable about lower-order bits of its decisions. You see that in cases like Trevor Noah making a minor change to a speech to influence a particular bet.
tptacek 7mo ago
You can see all across the responses here the encoded premise that the point of a prediction market is to enable people to profit from making accurate predictions. No. The point is for the price to be accurate; for the market to make an accurate prediction. That someone with a P1 prediction can roll over people with less confidence is a feature.
stouset 7mo ago
Not just insider information, but insider access. If the outcome of some prop bet is under the control of a handful of people, those people can trivially conspire to produce whatever outcome is most profitable to them.
- tptacek 7mo ago
  If the outcome of a prop bet really is fully controlled by insiders, so that those insiders are making decisions based on betting outcomes, then allowing that betting to occur seems antisocial and counterproductive to begin with. This is another problem with the Polymarket/Kalshi species of "prediction market".
  - wutwutwat 7mo ago
    > This is another problem It is insider trading, the thing everyone here is talking about
  - AnthonyMouse 7mo ago
    The problem is it's pretty hard to tell ahead of time whether that's what happens. Suppose some large private company has to decide whether they're going to build a new facility in city A or city B. This is useful information for all kinds of reasons. If you're a vendor then you need to start making preparations to set up shop in the city where your big customer is moving etc. The company's analysis shows it would derive a $10M advantage from building in city A. The prediction market is correctly leaning that way. If there are only enough counterparties that someone who now bets on city B and wins would make $5M, everything works the way it should and the company goes with city A. But if there are enough counterparties that a winning bet on city B would net you $25M then the company can place the bet, eat the $10M loss by choosing city B and come out $15M ahead. But the $10M number isn't public. It's essentially the thing you wanted the market to predict and it could be arbitrarily larger or smaller than that. So how are you supposed to know if the prediction market will be predicting the result or determining it?
    - tptacek 7mo ago
seanhunter 7mo ago
> Even if you buy the idea that Kalshi is a prediction market whose mechanism is gambling but whose product is accurate predictions, you don't have to buy the idea that insider trading is a good thing. 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-take/regulating-insider-trading-on-prediction-markets-102mp8l https://www.freshfields.com/en/our-thinking/blogs/a-fresh-ta...

c7b 7mo ago

Where do you see a difference? Like you said, there is a libertarian argument that can be made for why insider trading is desirable. If the bet is easily manipulable, like how many times someone will visit a place, then the rational response is for others not to bet on that market. The same argument still holds. 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?

kasey_junk 7mo ago
It’s not a libertarian argument for prediction markets that they should have insider trading, it’s the point of the exercise. The way they work is to incentivize people with knowledge to externalize the knowledge to the market. The concept of fairness doesn’t even make sense in that context. 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.
- c7b 7mo ago
  So the difference between a theoretically pure prediction market and Kalshi is ... this interview? The CEO saying that he thinks others, who do not answer to him in any way, will be doing something to enforce some notion of fairness. 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.
  - wmorgan 7mo ago
    Kalshi is in fact more strict, both defining and punishing insider trading, than CFTC/DOJ. Kalshi is perfectly happy to hand out bans and fines for activity the government doesn't care about. Every Kalshi market has a button on it, "report insider trading" which I'm sure is clicked a zillion times a day by gamblers who are upset they lost. The reason they do these things is that their first priority is to keep the gamblers happy, and the gamblers hate to think they got cheated. This just gestures at the meta-problem with prediction markets, who pays for the alpha? With stocks, companies generate returns to capital. With commodities, there are buyers and sellers of the underlying. But there is very little economic usefulness about most prediction markets, especially by volume. The only way to get enough users to justify the effort to figure out accurate prices, is to turn it into an entertainment product. And in an entertainment product, if the customer doesn't like X, then you crack down on X.

cyanydeez 7mo ago

Your surmise cuts both ways though; much of the stockmarket is fundamentally doing the same thing. It's just the prop bet is a normalized white collar activity. I'd like regulations to cut into that too, so the market isn't just a weird "Did trump tweet something deranged today?"

tptacek 7mo ago
Fairness isn't the justification for insider trading enforcement in the stock market, either.

AnthonyMouse 7mo ago

> 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. 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.

tptacek 7mo ago
At the point where you're arguing that it's better for a prediction market's prices to be less accurate, I think we've departed the original premise.
- AnthonyMouse 7mo ago
  You're predicting something which is happening in six months but is affected by data which is being published today. Do you want a more accurate price that comes in the afternoon, or a less accurate price that comes in the morning and then stays less accurate for months because the insiders ate too much of the expected profit margin to justify more expensive analysis?
  - tptacek 7mo ago
    I don't understand how your analysis works. How are you proposing people who are right early get run over by people who are right with certainty later?
    - AnthonyMouse 7mo ago

deleted 7mo ago

[deleted]