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This story went viral A prediction market user made $436k betting on Maduro's downfall.
In the comments, one thing I have observed is the willingness of people to defend insider trading. Here is the highest-upvoted comment on Hackr News:
"Using insider information is how you are supposed to win these. Otherwise it's just random gambling. This is not the stock market. There are no public reporting rules for the weather, song lyrics, what Kim Kardashian eats tomorrow."
Does this sound insane to anyone else? Why isn't everyone doing this, if they aren't already? Just create a market about things you know in advance, using proxies and crypto mixers to hide your identity and money trail if needed. An Nvidia employee could make a prediction market about an upcoming chip, or an Apple employee about an upcoming iPhone. More specifically, shill accounts would create markets pretending to be an outsider, and the employee and his accomplices would place the correct bets leading up to the deadline. Wash trades by accomplices could be placed to create hype and volume to lure unsuspecting traders.
My comments of course were downvoted. They always are. I could make a comment along the lines of the "Pizza tastes great" and I would be downvoted by every pizza hater on that site and no upvotes by everyone else who enjoys pizza, as is the counterintuitive nature of online voting patterns. Writing good comments is an art in and of itself.
The arguments for permitting insider trading are pretty straightforward from an economics perspective. We want prices to incorporate all available information. Limitations on trading by insiders prevent information from being incorporated into a price as quickly as it could be. So restrictions on insider trading make prices less efficient, less useful, than they could otherwise be.
I think the best counterargument I've heard comes from some of Matt Levine's writings on US equity insider trading. The basic skeleton is that the restrictions on insider trading reflect a duty of confidentiality you have to some entity with respect to that information. If I am an employee of a company and come into possession of some material nonpublic information I have a duty to my employer to keep that information confidential and insider trading restrictions are a reflection of that duty. Trading on that information (or sharing it to others for them to trade on) violates that duty by revealing that information.
What that second argument looks like in the context of prediction markets is less clear. I think in the specific Maduro case whoever did the insider trading probably had a duty of confidentiality with respect to that information. Likely to the United States government. I am not sure how well it generalizes.
One thing preventing just anyone from doing this is market liquidity. In order to make a substantial amount of money you need a lot of people to be willing to take the other side of the bet. Also, it seems like people are doing this. At least some of them.
There's also some weirdness in US law, specifically, about prediction markets technically being event contracts which are commodities and subject to different (more lax) insider trading rules than equities.
One strong argument against insider trading is that using the market you can profit off of any volatility. We want to stop insiders from having a motivation to create volatility.
Actually, modern financial instruments enable you to profit off low volatility too; look into iron condors and calendar spreads. I imagine this is one of the more common insider trading opportunities, in fact: if you know beforehand that this quarter's earnings report looks a lot like last quarter's (or the same quarter from last year, depending on the business), for instance, which it often will.
What you really profit from is not volatility but surprise. If you know better than market, you should be able to find a way to monetize that knowledge. Of course, your profit depends on degree of surprise, so it's hard to make much money when the market is already close to right.
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