The Robin Hanson reasoning--that insider trading is the point--seems hard to overcome. Banning insider trading on prediction markets would seem to reduce their ability to create information.
With that said, I myself no longer will be a participant in any markets in which I don't have insider information. There is too much adverse selection in a market where trading on insider info is allowed.
1. Insider dominance drains liquidity from prediction markets, making them thinner, more volatile, and less informative as market makers lose money and exit. So markets that are insider dominated will have the least volume.
2. As prediction markets scale (let’s say 10x), regulatory intervention becomes inevitable because the public simply won’t tolerate insiders making millions of dollars, however much they improve the accuracy of markets.
Yeah there are many attempts now to make prediction market parlays (combine multiple prediction market bets), to shorten the time horizon of prediction markets to minutes (as opposed to days), and to add leverage.
I don't disagree that they lessen liquidity (see me above lol). Maybe if we had no securities laws and people were proposing a ban on insider trading I'd be saying the same thing from first principles about insider trading providing valuable information for the pricing of stocks. Clearly, stock prices are still information signals with insider trading banned, so I guess PMs would still provide information too.
I understand that stocks are different in the sense that they perform a capital raising function for companies. And prediction markets don’t. Even so, if prediction markets have to scale, they need some measures to solve this problem.
This is an aside but it’s interesting that having insider trading laws don’t matter as much as enforcing them. A study showed that cost of equity in a country does not change after the introduction of insider trading laws, but decreases significantly after the first prosecution. https://ideas.repec.org/a/bla/jfinan/v57y2002i1p75-108.html
It’s almost better to have no insider trading law than it is to have an insider trading law that isn’t ever enforced.
super informative read
Thank you!
The Robin Hanson reasoning--that insider trading is the point--seems hard to overcome. Banning insider trading on prediction markets would seem to reduce their ability to create information.
With that said, I myself no longer will be a participant in any markets in which I don't have insider information. There is too much adverse selection in a market where trading on insider info is allowed.
I think you should write a post about the emerging derivatives on prediction markets. (https://www.lesswrong.com/posts/LBC2TnHK8cZAimdWF/will-jesus-christ-return-in-an-election-year https://derivative.polymarket.com/jesus-christ-return-before-2027-odds-5-february-17-12-1-am-3)
My counter to Robin Hanson’s argument is:
1. Insider dominance drains liquidity from prediction markets, making them thinner, more volatile, and less informative as market makers lose money and exit. So markets that are insider dominated will have the least volume.
2. As prediction markets scale (let’s say 10x), regulatory intervention becomes inevitable because the public simply won’t tolerate insiders making millions of dollars, however much they improve the accuracy of markets.
Yeah there are many attempts now to make prediction market parlays (combine multiple prediction market bets), to shorten the time horizon of prediction markets to minutes (as opposed to days), and to add leverage.
I don't disagree that they lessen liquidity (see me above lol). Maybe if we had no securities laws and people were proposing a ban on insider trading I'd be saying the same thing from first principles about insider trading providing valuable information for the pricing of stocks. Clearly, stock prices are still information signals with insider trading banned, so I guess PMs would still provide information too.
I understand that stocks are different in the sense that they perform a capital raising function for companies. And prediction markets don’t. Even so, if prediction markets have to scale, they need some measures to solve this problem.
This is an aside but it’s interesting that having insider trading laws don’t matter as much as enforcing them. A study showed that cost of equity in a country does not change after the introduction of insider trading laws, but decreases significantly after the first prosecution. https://ideas.repec.org/a/bla/jfinan/v57y2002i1p75-108.html
It’s almost better to have no insider trading law than it is to have an insider trading law that isn’t ever enforced.