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.
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.
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".
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?
A private company of any real size isn't plausibly going to choose Atlanta over Chattanooga to win a prediction market bet. This is a good example of the kind of prediction that can theoretically be prosocial, and one strong indicator that it might be is that an insider bet is helpful rather than harmful.
On the other hand, at the point where the prediction market winnings are material enough that they might alter the underlying decision itself, you've clearly got an antisocial structure. Prediction markets that don't want to be seen as mere prop betting venues should refuse to run markets on those questions.
> On the other hand, at the point where the prediction market winnings are material enough that they might alter the underlying decision itself, you've clearly got an antisocial structure.
How is that supposed to be determined?
There are many decisions that have only minor implications to the party making them (they're choosing between two nearly-equivalent alternatives) but massive implications for third parties (the company or city chosen gets a huge gain and knowing which one is valuable information). When the decision itself is essentially a coin flip, any prediction market winnings could alter the underlying decision. And whether it's that close of a decision is the thing the market would be trying to predict rather than something you already know.
A different example would be people bettering on whether a politician/celebrity will wear a certain color at an event. Since these apps allow exactly these sorts of trivial bets, this is not an stretch. That politician/celebrity or their team could easily wear a color that aligns with their bets. This seems indistinguishable from a scam.
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?
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"
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.
You're confusing collusion with being informed. The concept of market rationality is based on the premise that all participants in said market more or less have access to the same information. Fools can choose to not be informed before making a trade, but passing along sensitive information that contradicts market rational behavior causes people to lose trust in the market.
Perfect example from today. Allbirds just announced that they're going all in on AI infra, skyrocketing the stock. Had I bought a million dollars worth of Allbirds yesterday, everyone would think I'm an idiot. But now, they would think I have insider information and would no longer want to participate because it would make no sense to buy Allbirds yesterday unless I knew the announcement was coming.
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?
> 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.
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.
> 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.
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.
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.
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.