Is Insider Trading Good for Prediction Market Users?

Insider trading scandals involving prediction markets have been all over the news in recent weeks. A U.S. Army soldier reportedly used classified information from the Nicolas Maduro raid in Venezuela to trade $33,000 on Polymarket and cashed out $400,000 when the trade was successful. Recently, political candidates traded on their own races on Kalshi, resulting in fines and suspensions.

This has led to reforms on both platforms, which bar politicians from trading on their own campaigns, athletes from trading on their own leagues, and employees from trades involving their own employers.

However, a professor at George Mason University, Robin Hanson, claims that insider trading on prediction markets leads to the most accurate pricing. It would appear, if his hypothesis is correct, that the whole point of prediction markets is insider trading. And if you’re still not sure, this professor helped create the market scoring rule used by many prediction markets.

Prediction Markets Insider Trading: Good for Users?

Prediction markets already operate in a gray area. They attract a huge portion of the young, male population and create headaches for policymakers as many argue that these platforms are no different than gambling, just with different packaging. Morality aside, this creates a huge legal issue.

However, from an economist’s perspective, like Hanson, prediction markets reveal the truth (through Yes or No outcomes) as fast as possible. This is based on the assumption that insiders will trade. If that doesn’t happen, then the markets can only react to news as fast as polling or a major news source.

Is Insider Trading Already Built into Every Financial Institution?

Insider trading is illegal thanks to the Insider Trading and Securities Fraud Enforcement Act of 1988, but Hanson argues that it remains rampant in many financial institutions.

Obviously, there are secrets within organizations, and the general public wants to know these secrets, but Hanson is arguing for a sort of “middle ground.”

Hanson argues that financial markets exploit everyday people the same way prediction markets allegedly do. This is revealed when company markets move before a major announcement is made public, which can only be explained through insider trading or very savvy traders. When this happens, the SEC can only target a small percentage of those trades.

Are Prediction Markets Good for Society Despite Insider Trading?

Despite the insider trading, Hanson claims that prediction markets are a “democratic institution that allows everybody to participate.”

Prediction markets are much more accessible to the average person than buying stocks and offer a variety of markets, many of which are more appealing than predicting whether shares move up or down.

Yes, insider trading exists, and as we’ve seen, it’s prosecuted when it becomes public. However, it’s probably not going anywhere because, as is clear from traditional stock markets, it’s simply too hard to catch everybody — even with laws in place.