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Comment by w10-1 | Hacker News Reader

Speculation and concern from a naive observer:

Is it polymarket presenting this ability to detect insiders? Or is someone trying to sell the service of detecting insiders to those wanting to know if bets are on equal footing? (or wanting to follow insiders? or wanting to hide your identity by making multiple accounts? Are there per-account fees, when polymarket might encourage people to make multiple accounts?)

Regardless, polymarket seems to be on balance corrupting, by monetizing and normalizing use of inside information, which violates agency principles. It's not clear that it really offers hedging or predictive benefits.

When trading firms do better (after data discovery and analysis), there's some evidence they're better than other firms, and you can trust them with some money. But when there's a public prediction market, the only benefit is to the insiders.

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Post author here: To clarify, this is not a post from Polymarket.

This is talking about using Compound AI (product I'm working on) to query Polymarket data, including finding insiders, just as a fun example analysis you could do.

Often you need a well-calibrated probability of a future event to feed into some other analysis, and Polymarket is pretty great for that. An example is how much insurance (hedge) to buy for some disastrous event.

Why dont you just copy the trades?

If I'm an insider with 100% confidence, I'll take all offers at a certain price as long as I can afford it. Similar story for lower levels of confidence (but still inside info). There won't necessarily be any left for you to copy at a viable price.

You might not have enough money to drain the order book.

And there's always a chance things go wrong, even with inside information. It would be unwise to go all in.

The examples didn’t look like they’ve completely emptied the orderbook

Because there's always some uncertainty and capital limits. But the uncertainty about the outcome is itself inside info, and that's compounded with your own uncertainty about the insider as a copy trader. So the insider will empty out certain price levels only, and your certainty is strictly less than theirs, meaning you have even fewer viable levels to buy.

> Similar story for lower levels of confidence

therefore, the polymarket betting odds will reflect the truth - even if that info is a secret that nobody else but the insider knows. And if this is the case, then even an outsider could make use of the odds as a source of info which would ensure that market efficiency (which is about the flow of information) is high.

So what's wrong with insider trading again?

If you believe Polymarket as a serious source of truth, consider that somebody manipulated "Will Jesus Christ return before 2027?" because there was a secondary market on whether that market will rise above 5%. Which defeats the whole idea that the betting odds will reflect the truth. Also even pre-manipulation I don't think a 2% chance that Jesus will return was reflective of truth.

https://gizmodo.com/checking-in-on-polymarket-bets-on-christ...

The issue comes from situations where the insiders can alter the answer to help their own bets. The simple example is the bet on how long a press conference will be: It's a ridiculous bet when the person giving said press conference can bet and fleece the market.

Will X country invade another before or after day X? A large enough market changes the answer, as the agent can change the decision. And we can see this kind of thing in many interesting questions.

These are not secret divinations though, the participants know this and price it in or otherwise allow it to determine which markets they participate in.

That someone with inside information will e.g. make 500% while those late to the party e.g. only get 10%? (of course your example is not very realistic to begin with)

So is any kind of business illegal? Making investments?

How is this distinguishable from pump-dump?

It rewards blatant corruption? What's the benefit is the bigger question.

The benefit is that inside information becomes public information. The reward for the insider is just the necessary incentive for that to happen.

Has there ever been any documented circumstance where significant inside information became public and known thanks to a trade? Most often, the trade is made at the last minute, and the information gets subsequently revealed anyway. And it's impossible to tell whether somebody is an inside trader, a wealthy gambling addict making a stupid decision, or hypothetically a foreign agent pretending to be an inside trader to make people believe in a particular outcome.

It's impossible to know anything for certain; almost everything is probabilistic.

Also I'm not sure how to interpret your criteria because timing matters, I don't think saying 'it gets revealed in the end' is very meaningful.

Anyway, on Polymarket specifically, sure, military strikes are a common one. Seems like a useful signal to go hide in the basement. Outside Polymarket, there were insider trades in 2008 that I'm sure were useful.

Past performance is not an indicator of future performance.

Shouldn't it be if you suspect they are executed by an insider?

You can't be sure that they are an insider or lucky, just from onchain data.

If they make single market predictions with high accuracy it is very very likely they are

No vigilant insider is making a series of "single market predictions with high accuracy" on the same account. They would make unlinkable bets on fresh accounts.

> No vigilant insider is making a series of "single market predictions with high accuracy" on the same account.

There seem to be quite a few non-vigilant insiders. That's the very premise of the post we're discussing.

This is unsurprising to anyone who's seen the various ways people get busted for insider trading in equities.

Also insider trading is A-OK on prediction markets!

> Regardless, polymarket seems to be on balance corrupting, by monetizing and normalizing use of inside information,

This is a common take on "inside information", but for most people this opinion is totally unaligned with their own goals. The people who benefit from "no insider trading" in any market, are a small group of active traders, some institutional, some not.

For literally everyone else, insider trading is a net win. Insider trading improves price discovery. If you passively invest then you benefit from the price being more accurate when whatever fraction of your paycheck goes into the market.

I don't know your own situation, maybe you are one of those few traders who needs information to spread a certain way in order to make money. For everyone else, don't be fooled into promoting an idea against your own interests.

In fact, a lot of people claim that the main point of prediction markets is to give the general public better predictions, and insider participation actually helps with that.

This is missing the primary reasons insider trading is bad, which are that it's an information theft incentive against employers, and worse, that it's a sabotage incentive.

I'm honestly puzzled by this take.

Clearly the people who benefit from insider trading in any market are those doing the insider trading, not all market participants.

The argument is not that Polymarket et al are "insider trading only" but rather that insider trading in those markets is not regulated so people can get ahead of trades based on confidential information and make a lot of money off of all the suckers gambling their money away on ridiculously frivolous bets.

If you don't see the problem with that, you're complicit, misinformed or brainwashed.

A similar issue is that of market manipulation, since many markets in these platforms can be directly manipulated by participants in manners as easily as spamming some words on an earnings call.

> If you don't see the problem with that, you're complicit, misinformed or brainwashed.

The problem that I imagine you see with this, is that it doesn't conform to a particular, special, notion of fairness that you think the market should have.

Informed parties have an edge over uninformed parties. This edge is "unfair" if you believe the market should be a lottery. The market is designed to pay people with accurate beliefs, by taking from people with inaccurate beliefs. Everyone's belief is valued based on its accuracy, and the market is fair in that sense. Fairness is actually irrelevant to the societal good the market provides, which is to produce accurate prices. A third party, who doesn't participate, shouldn't care about the market being "fair", they should care about it giving good information.

> A similar issue is that of market manipulation, since many markets in these platforms can be directly manipulated by participants in manners as easily as spamming some words on an earnings call.

If you are betting on what a person will say, and the person knows about the market, that is a chaotic system. If you bid the price away from max entropy then you deserve the outcome.

This has nothing to do with fairness of outcomes but with defrauding naive investors of their money.

For context, I'm a former Investment Banker so this isn't coming from a place of naivete but an informed view. I did have to study SEC regulations for those FINRA examinations....

I think you might misunderstand the value preposition. Polymarket wants insider trading. That's the whole point. They'll eventually cave in to PR pressure and deviate from the original purpose, though.

Some of the things people bet on can be decided by a single person.

The more accurate the markets get, the greater the incentive for insiders to spoil it.

That doesn’t benefit anyone but the insider and probably has a net negative on everyone else.

>But when there's a public prediction market, the only benefit is to the insiders.

false.

all the conclusions economists draw in microeconomic theory about efficient markets are based on pricing that reflects symmetric information. secrets are asymmetric. trading on inside information drives the market price in the direction it should be moving, making the market more efficient, a benefit to all participants in the market.

this is not a defense of trading on inside information, simply pointing out the mechanics.

We're not solving for efficient pricing at the expense of one insider reaping all the benefits because they already either knew or set the price before hand.

if you have no knowledge of any inside information and you are trying to make a buy/sell investment decision, your decision benefits from the price being as accurate as possible. That is what every individual is "trying to solve" so it's a net benefit.

except there is nothing to buy/sell here other than the prediction itself.

Or do you also think it would make sense, in a hypothetical scenario, to buy options on a stock price that is already known by some in advance? There’s a reason you’re not allowed to trade on insider information. You’re totally missing the point here.

This is largely the classical objection to prediction markets. But prediction markets do have value to outside of the markets because people want to know the future.

Yep it's rotten. I think the intuitive revulsion many feel toward the Polymarket is simply due to the unfairness of it.

Prediction markets should be accurate, not fair. If people want to gamble without doing the work of finding some alpha, they should head to a casino, not a prediction market.

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