> I'm trying to understand what the criticism is here, because the example seems to support the point that these are meant to be a way of learning the future, not oppose it.
Indeed. Insider trading is a feature of prediction markets, not a bug. There are two kinds of people who participate in prediction markets:
1. People who have insider information, or at least more sophisticated predictive capability than your average person.
2. Gamblers.
In effect, prediction markets are a way to move wealth from the second group to the first. If you understand that and still want to participate, cool. It's your money, and you're allowed to gamble it away if you find that entertaining.
At any rate, given the relatively small-potatoes level of bets going on at Polymarket and Kalshi, the article author's breathless anxiety about this is a bit overblown.
> 1. People who have insider information, or at least more sophisticated predictive capability than your average person.
This bucket as you've defined it is too broad.
There are a few different kinds of non-gambler participants in prediction markets:
1. People with "insider information" as we think of it - they "know" the answer to the market because they are "involved" somehow.
2. People who aim to do superior analysis of publicly available information to produce an edge. For example, an AI firm with better hurricane prediction modeling may try to monetize that by betting on whether or not a hurricane will impact an area.
2b. People who do the work to create new information. For example, the Trump 2024 election market on polymarket famously had better odds for Trump than polling. It turned out that a mega whale was bidding Trump up because he had paid for his own private polling in battleground states and that gave him confidence Trump was going to win.
In short, it's mostly incorrect to suggest that prediction market participants are either illegitimate insiders or gamblers; there is a third class of actors that are a very important cohort: those who do the work to create better predictions and monetize their work by betting in the markets. This third cohort of professional predictors is the most important in long-term prediction market growth.
Kalshi and Polymarket have a billion dollar of open interest between them (though velocity here matters too and volume is not very useful). The important thing is they are growing fast. Which means it might become big-potatoes very soon.
Insider trading in stocks are prohibited but not for the reason most people think. It has nothing to do with someone having an unfair advantage in an informational sense, and everything to do with fiduciary responsibility.
The CEO and executive team has fiduciary responsibility to act in the financial best interest of the shareholders. Your broker too.
If you have insider info (Obtained legally) but no fiduciary responsibility you can act on it. That’s why congress members trading US equities based on decisions they’re privy to is not, from a legal perspective, insider trading. They don’t have a fiduciary responsibility to their constituents
1. The misappropriation theory of insider trading covers anyone who trades on material non public information sourced through a trusted relationship regardless of any fiduciary duty to the company. For example, if I tell my personal attorney a non public fact about the company I work at, and they trade on that information, they absolutely can be found guilty of insider trading despite having no relationship to the company at hand.
2. Congress is explicitly covered by insider trading law, which was affirmed in the STOCK Act of 2012. The fact that they’re rarely indicted has more to do with the legal and political challenges associated with doing so, not the legality of the act.
> The misappropriation theory of insider trading covers anyone who trades on material non public information sourced through a trusted relationship regardless of any fiduciary duty to the company. For example, if I tell my personal attorney a non public fact about the company I work at, and they trade on that information, they absolutely can be found guilty of insider trading despite having no relationship to the company at hand.
Huh. The lawyer example works because attorneys have a very specific, enforceable duty of confidentiality. Swap that relationship out and the conclusion may change. As written, the comment slides from "duty-based misuse of information" to "any private knowledge you shouldn’t have," which is not the same thing.
A lawyer (not my lawyer) gave me his off-the-cuff opinion on this scenario:
A pharmacologically-literate clinical trial participant for a novel new drug strongly suspects he did not receive the placebo/comparator drug, based on the subjective effects, plus their own pharmacology knowledge, experience with the placebo, and the research on the candidate drug.
However, this drug was not therapeutic for him, the side effects were onerous, or perhaps he believes the trial will be halted. Whatever their reasoning behind his inference, no details of others’ experiences were leaked to him, blinding was maintained; protocol was followed. He didn’t base this on a lab readout.
Based on his understanding of published research on the candidate drug, and projecting from his lived experience as lab rat, he believes this trial should disappoint shareholders. At the very least, shares may be priced too high.
Can the participant, based on this inference, invest $$$ shorting the pharma firm? This drug is considered the firm’s last best hope.
Their answer was yes, basically. He can trade on this non-public info.
This scenario seems very different because nobody gave the person any material non-public information at all, they simply deduced it from their experience participating in the trial. This feels similar to the question of "can a passenger on the Boeing jet with the door plug that blew out trade on that information" to which the answer appears to be yes.
Misappropriation theory is the following:
> The misappropriation theory of insider trading is a form of insider trading where an individual trades stock in a corporation, with whom they are unaffiliated, on the basis of material non-public information they obtained through a breach of a fiduciary duty owed to the source of the information
The important part, which you're right was unclear in my comment is that the recipient of the information must have a fiduciary relationship with the source of the information, even if they do not have one with the company in question at all. That's the distinction.
Indeed. Insider trading is a feature of prediction markets, not a bug. There are two kinds of people who participate in prediction markets:
1. People who have insider information, or at least more sophisticated predictive capability than your average person.
2. Gamblers.
In effect, prediction markets are a way to move wealth from the second group to the first. If you understand that and still want to participate, cool. It's your money, and you're allowed to gamble it away if you find that entertaining.
At any rate, given the relatively small-potatoes level of bets going on at Polymarket and Kalshi, the article author's breathless anxiety about this is a bit overblown.