Prediction markets have been dealing with a rapid flooding of insider trading allegations. The infractions have known no bounds, with beneficiaries ranging from Google employees to military service members. One proposed quick fix? To simply allow it to happen.
It sounds crazy, but that’s precisely what Daily Maverick columnist Stephen Booysen Sidley is suggesting. He made waves recently after he said allowing people with nonpublic information to make trades could actually signal pertinent information to changing markets, allowing the public to adapt and potentially profit just as easily.
A Radical Solution to Illegal Prediction Market Activity
If you can’t stop them, just give up. Despite Kalshi and other big prediction market platforms displaying elite surveillance ability when it comes to tracking insider trading, a Daily Maverick columnist thinks allowing the activity may be the best way to solve this ongoing issue.
The idea comes with parameters, of course. Stephen Booysen Sidley says it could work if strict disclosure requirements were met. In theory, anyone with nonpublic information could wager on an event contract, but the movement they cause would trigger key data in real time, allowing public bettors to decide which side of the contract they want to back.
Stephen Booysen Sidley used a CFO knowing about the purchase of a company as an example. In this situation, the CFO might buy “yes” contracts on the event market, but by doing so, the public would automatically be alerted of the major movement and be able to adapt.
The catch? The plausibility of this idea hinges on bet visibility. The market movement would need to be fully transparent. Numerous restrictions would need to be in place, with one possibility being a clear view of who is changing the market and whether or not they possess inside information.
The Key Positive to Insider Trading in Prediction Markets
It feels crazy to be spinning prediction market insider trading as a positive, but here we are.
While there is a long way to go for this to begin making any kind of sense for prediction markets, one positive would be the fact that insider trading would make the event markets much more accurate.
Prediction markets start off with aggregated information, but when someone has inside information, they theoretically make the market more accurate through trading.
Another piece to the puzzle is the fact that people with inside information aren’t always right. If they are correct, however, regulating their reach via trades can ensure a level playing field, while simultaneously generating markets that aren’t about guessing outcomes, but based on actual facts.
Prediction Markets Need Insider Trading Rules
While the approach of just letting insider trading happen feels extreme, there is some upside to it. Whether that is where the prediction market industry is headed or not, there’s no getting around some clearly defined rules to ensure fair trading is at the forefront.
If insider trading ultimately is allowed, restrictions and transparency would still be key. And if it’s completely disallowed, there need to be policies in place to raise legality awareness, catch predatory behavior, and hand out punishment when infractions occur.
The Trade Handle Prediction Markets Take
Making prediction market insider trading the norm would actually relieve pressure from the platforms, take a bit bite out of any advantage insiders possess, and also render markets much more accurate.
Prediction markets already have a distinct advantage against online sportsbooks due to the way their bests are placed, but a clear hiccup is how they handle regulatory concerns.
Whether prediction market sites decide to listen to Stephen Booysen Sidley or enforce heavier restrictions and harsher punishments remains to be seen. However, clarity and more transparency in the world of prediction markets will never be seen as a bad thing.