Kalshi CEO expects US DOJ to prosecute insider trading cases | Hacker News Reader

Kalshi CEO expects US DOJ to prosecute insider trading cases

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132 pointsthm144 comments

This issue reveals the gap between the prediction market premise and what these things actually are, which is: unregulated prop gambling venues.

If things like Kalshi and Polymarket are prediction markets, then, at least as far as the intrinsic concerns of the market itself are concerned, insider trading is a good thing; literally part of the point.

If they are instead how they function today, then insider trading is a game-breaking fairness issue, like having a device to read your opponents cards in a poker game, and then they're a real problem.

You can tell what these businesses think their platforms are for by how they handle these issues.

Courts have ruled that these markets are regulated under the CFTC. So they are regulated. Now as to whether it is properly regulated, thats a different matter.

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.

> 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.

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.

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?

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?

Nothing, that is why you quickly learn to not make stupid bets like that. If you don’t learn, then I guess survival of the fittest and all that.

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"

https://en.wikipedia.org/wiki/Goodhart%27s_law

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.

A fact is a statement about past. A bet is contingent on the future.

Insiders can change the facts.

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.

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".

> This is another problem

It is insider trading, the thing everyone here is talking about

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.

> 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.

[2] https://www.freshfields.com/en/our-thinking/blogs/a-fresh-ta...

Where do you see a difference? Like you said, there is a libertarian argument that can be made for why insider trading is desirable. If the bet is easily manipulable, like how many times someone will visit a place, then the rational response is for others not to bet on that market. The same argument still holds.

You can disagree with the libertarian argument, but I don't see how you can say that Polymarket et al. are something other than a prediction market. Can you explain where you see the difference?

It’s not a libertarian argument for prediction markets that they should have insider trading, it’s the point of the exercise. The way they work is to incentivize people with knowledge to externalize the knowledge to the market. The concept of fairness doesn’t even make sense in that context.

So if a market is trying to maintain a veneer of fairness it’s just using a prediction market as cover and is something else.

So the difference between a theoretically pure prediction market and Kalshi is ... this interview? The CEO saying that he thinks others, who do not answer to him in any way, will be doing something to enforce some notion of fairness.

If you're being that puritan about the definition, then having a "real" prediction market is completely impossible. Because actors like the DOJ do not wait for a statement by the Kalshi CEO to bring charges. And rational actors will know and anticipate that, and hence preemptively comply. So you never get the unfettered version of a prediction market.

I don't think it makes sense to be that puritan about a definition that the thing it's trying to define becomes an impossibility. Polymarket, Kalshi et al are clearly prediction markets in the messy reality that we live in, and we're figuring out as we go what the legal reality of a real-world prediction market is and should be.

Kalshi is in fact more strict, both defining and punishing insider trading, than CFTC/DOJ. Kalshi is perfectly happy to hand out bans and fines for activity the government doesn't care about. Every Kalshi market has a button on it, "report insider trading" which I'm sure is clicked a zillion times a day by gamblers who are upset they lost.

The reason they do these things is that their first priority is to keep the gamblers happy, and the gamblers hate to think they got cheated.

This just gestures at the meta-problem with prediction markets, who pays for the alpha? With stocks, companies generate returns to capital. With commodities, there are buyers and sellers of the underlying. But there is very little economic usefulness about most prediction markets, especially by volume. The only way to get enough users to justify the effort to figure out accurate prices, is to turn it into an entertainment product. And in an entertainment product, if the customer doesn't like X, then you crack down on X.

I'm not a libertarian. My basic policy take on these "markets" is that they should be outlawed.

Your surmise cuts both ways though; much of the stockmarket is fundamentally doing the same thing. It's just the prop bet is a normalized white collar activity.

I'd like regulations to cut into that too, so the market isn't just a weird "Did trump tweet something deranged today?"

Fairness isn't the justification for insider trading enforcement in the stock market, either.

> If things like Kalshi and Polymarket are prediction markets, then, at least as far as the intrinsic concerns of the market itself are concerned, insider trading is a good thing; literally part of the point.

That depends on what the effects are.

Suppose that predicting things well requires both information and analysis. Early access to information is therefore a competitive advantage: Even if you're not as good at analysis, having the information before anyone else and then getting the analysis right 65% of the time is more often than not going to let you beat the people who get the analysis right 85% of the time once they have the information. Which is to say, it will make it less profitable for the people who are better at analysis to participate in the market, and then fewer of them will.

So the question is, what do you want? An answer which is right 65% of the time slightly sooner, or an answer which is right 85% of the time slightly later? It's valid to want the second one.

At the point where you're arguing that it's better for a prediction market's prices to be less accurate, I think we've departed the original premise.

You're predicting something which is happening in six months but is affected by data which is being published today. Do you want a more accurate price that comes in the afternoon, or a less accurate price that comes in the morning and then stays less accurate for months because the insiders ate too much of the expected profit margin to justify more expensive analysis?

I don't understand how your analysis works. How are you proposing people who are right early get run over by people who are right with certainty later?

Suppose there is a yes/no question on a prediction market which currently has "yes" at 0.20 and "no" at 0.80. Some data is about to be published that unambiguously makes "yes" more likely, but it's less obvious how much more likely and a more accurate prediction requires more resources or skill.

Further suppose you were going to spend resources analyzing the data and after that your conclusion would be that "yes" is a buy at up to 0.75, i.e. you think there is a 75% chance of it happening. And it turns out you were on the right side because it does end up being yes.

If everyone gets the data at the same time, you can start buying "yes" when it's still at 0.20 and keep buying it until it gets up to 0.75. If someone gets the data before you, even if they're (wrongly) less confident than you and only buy at up to 0.55, they start buying a day earlier and by the time the data is published, "yes" is already at 0.55. The result is that you, who were a buyer at up to 0.75, get significantly fewer contracts (because the other sellers already sold to the insider), and worse yet you only get the ones that cost more than 0.55 instead of getting many of the ones that were 0.20. In other words, you make significantly less money when it ultimately turns out you were right.

If your average profit is now less than the amount you needed to justify doing the analysis, you stop doing it, and then you don't buy any contracts at all. Then the price ends up stuck at 0.65 "yes" instead of 0.75 "yes" when "yes" was the right answer, because there wasn't enough profit left to fund an analysis that could justify higher confidence in the correct result.

In stock markets, insider trading is a big no not because it ruins someone's gambling habit, but because the entire concept of the corporation requires a certain amount of trust of financiers in financees. That whole pooling of capital thing, to do stuff that has too high a capital requirement to start individually. When shares are publicly traded, that trust is impossible when holders have to assume that they will be gamed by employee-owners and that would mean nobody outside the circle of those in the know would ever put in money and then you could just give up and declare that publicly traded corporations simply can't exist. "Don't bother investing, they will strip you".

Prediction markets don't have any "natural" reason like that for excluding insider trading. It's just "game designers" crying their hearts out when someone ruins their game by having an advantage.

The employee could not be an insider if his employer did not exists because of a lack of rules against him trading. The prediction market not existing would not make the insider any less of an insider (we are not tking about people inside the prediction market maker!)

> Prediction markets don't have any "natural" reason like that for excluding insider trading

Corporate employees abusing trust are doing it equivalently whether they trade securities or place bets. Government employees, similarly, don’t personally own the country’s data.

In a minority of cases, the information is one’s own, e.g. bets on how many times a person says a word. But most of the time, there is a breach of trust.

It's not just data, right? Power can be abused as well. That person has power to control the narrative and can make a large bet on the number of times he can say the word.

So now it's public servants military power, congressional power, and they look to enrich themselves with making (or lobbying for) decisions which affect the outcome of a bet.

You could imagine an army general that lobbies for the bombing of Iran knowing the president has his ear, and then bets on the bombing of Iran by March 2026.

> Corporate employees abusing trust are doing it equivalently whether they trade securities or place bets.

But the crime the article is talking about isn't "abusing trust", it's insider trading. Insider trading is defined in a specific way. For one, as far as I understand it, it must involve securities.

> Insider trading is defined in a specific way. For one, as far as I understand it, it must involve securities

I just remembered that Dodd-Frank expanded insider trading to cover e.g. commodities [1]. So it definitely applies outside securities in the U.S.

[1] https://www.lw.com/admin/upload/SiteAttachments/Alert%202827...

> Prediction markets don't have any "natural" reason like that for excluding insider trading.

No, they have a different reason. Consider the consequences of a sufficiently large prediction market bet on whether or not <head of state> will be assassinated this year.

Consider also the consequences of insiders and decisionmakers having an immediate financial incentive to take the other side of a bet whose outcome they control.

It's called assassination markets.

There is a RFC on Bitcoin talk from 2011 https://bitcointalk.org/index.php?topic=26350.0

When the pot gets big enough, there is no difference between a prediction market and an assassination market.

>Prediction markets don't have any "natural" reason like that for excluding insider trading. It's just "game designers" crying their hearts out when someone ruins their game by having an advantage.

I can think of a few very good reasons you would want to prohibit insider trading on prediction markets. Betting on war outcomes; being incentivised to commit war crimes or throw vital operational goals for financial gain. Wagering on public figures' jobs; being incentivised to harm them.

If I worked at Amazon, "AWS outage by ... date" bets on Polymarket would look mighty tempting.

CFTC's guidelines around prediction markets specifically call out war outcomes.

"As a general matter, DCMs are reminded that section 5c(c)(5)(C) of the CEA provides that the Commission may determine that an event contract is contrary to the public interest if the contract involves, among other things, assassination, war, or terrorism."

The guidelines are at https://www.cftc.gov/csl/26-08/download

Of course there's a natural reason: conflict of interest. If someone bets on a release date or a product being cancelled, then they can gain for reasons contrary to the good of their employer.

Corporations depend on controlling the compensation to their employees in order to incentivize them to produce benefit to the corporation. If there is an uncontrolled route to compensation via a prediction market, then the corporation loses its ability to trade compensation for alignment with its objectives.

> The prediction market not existing would not make the insider any less of an insider

Correct, but the prediction market existing makes the insider less of an employee. (Actually, the prediction market not existing would make the insider more of an insider, in that if insider benefit via prediction markets is unregulated, corporations will be forced to limit the information and authority of its employees.)

I don't understand why it is a crime under current US law.

Prediction markets can only do sports gambling (the vast majority of their volume) because they self-certify under the CFTC. The CFTC doesn't have the same standards of "insider trading" as the stock market, because insider trading is the entire point of business at the CFTC!

If you're trading, like, oil futures or wheat futures or whatever, you are likely doing so specifically because you have inside information about your business needs or production that you want to hedge.

I understand why people are mad about gambling versus someone who has insider information, but under current US law I'm not sure that there is a case to be made.

> Prediction markets can only do sports gambling (the vast majority of their volume) because they self-certify under the CFTC

Sports betting is still illegal in 11 states. They can only do what they’re doing because of legislation and enforcement lag.

> The CFTC doesn't have the same standards of "insider trading" as the stock market, because insider trading is the entire point of business at the CFTC!

True to some extent, but it’s still illegal to use non-public information gained from your firm to trade on personal accounts.

> If you're trading, like, oil futures or wheat futures or whatever, you are likely doing so specifically because you have inside information about your business needs

Insider trading, in the U.S., is not legally about fairness but about theft. A firm hedging its own positions is using its information for its own purposes. A federal employee trading on what they heard is abusing the trust placed in them by the American people.

Note that the 2nd circuit tossed an insider trading case on government information on the basis that it doesn't count as "property".

See United States v. Blaszczak.

It may be abuse of trust but that's not automatically a crime.

Or it maybe a crime but not insider trading.

Isn't the entire point of prediction markets to surface insider trading as a feature and not a bug?

Short, casual reads

- https://jamaalglenn.substack.com/p/prediction-markets-were-d...

- https://money.com/prediction-markets-insider-trading/

More academic?

- https://mason.gmu.edu/~rhanson/insiderbet.pdf

AND

- https://www.youtube.com/watch?v=4yZKGbq1YmA

Discussion on possible solutions that references the academic view

- https://www.dopaminemarkets.com/p/how-to-solve-insider-tradi...

This is a case where normal people's ideas of fairness may never agree with the experts.

> “If you commit insider trading on Kalshi, that can and will at some point be a federal crime. It is a federal crime,”

Am I misunderstanding? It seems like two different statements he always conflates.

If it becomes a federal crime at some point, it will become illegal from that point — you can't prosecute people for acts committed before they were crimes.

The only way that this could be a federal crime right now is if the government starts prosecuting it under existing laws without any changes. I don't see that as likely.

IANAL, but my understanding is that they can make it a retroactive crime or clarify existing laws in ways that include prediction markets.

Don't assume safety.

Edit - was curious:

https://en.wikipedia.org/wiki/Ex_post_facto_law

So maybe not?

I'd love a judicial scholar's input.

They absolutely cannot make it a retroactive crime. This isn't so much con law as high school civics in the US.

A couple decades ago I would have agreed with you. But the United States today does not have rule of law, only the pretense of it.

“Retroactive” crime is as you say, ex post facto, and specifically disallowed by the US Constitution.

No, you cannot retroactively make something a crime as you have found.

That way lies madness.

If the govt could do that, they could arrest anyone, anytime simply by making whatever they did yesterday retroactively illegal.

IANAL but a proud American haha, and we're very specific on not allowing ex post facto laws per our constitution. It would be a huge avenue for abuse of power by the government against the people.

The caveat I added to my initial comment that you also mentioned was that they could try to find a relevant existing law and retrofit it, e.g. general securities laws, and say that this is a securities market and so this has always been illegal — but it's very unlikely and I doubt it would work. Far, far more likely that we pass explicit laws about this.

The executive branch executes laws (prosecutes crime) under its own interpretation of the law. It's the supreme court that determines if that interpretation is acceptable or fair. I.e. you could be prosecuted under an executive's interpretation of an existing law when the crime was committed and if the court deems it acceptable you could be found guilty by a jury. (In the USA)

It is a federal crime, but one could be forgiven for assuming federal crimes committed by this administration will not be prosecuted while this administration is in power.

> one could be forgiven for assuming federal crimes committed by this administration will not be prosecuted while this administration is in power.

Nobody in this administration is going to be prosecuted no matter who is in power.

https://archive.is/TpLqO

A reasonable opposition party would declare the pardons invalid. Is that a valid interpretation of pardon power, does that undermine the legitimacy of our laws? Maybe, but not nearly as much as not punishing obvious and proud criminals does. That's the point of the rule of law, remember? It creates legitimacy, and therefore stability.

> A reasonable opposition party would declare the pardons invalid. Is that a valid interpretation of pardon power, does that undermine the legitimacy of our laws?

No, in the USA the pardon power belongs to the President. Only a constitutional amendment could invalidate pardons.

As we are finding out in real time, the President has the power to try to do a million things, legal or illegal, constitutional or unconstitutional, and then whichever ones don't get pushback defacto become actual powers. Throw something at the wall, if it sticks, then it's a Presidential Power. If it doesn't, there's no consequences. Just shrug and throw something else at the wall.

The President's pardon power is enumerated in the Constitution and has been litigated extensively.

https://constitution.congress.gov/browse/essay/artII-S2-C1-3...

Which ultimately doesn't matter. If the president tries to do something, and no court actually stops him, then it doesn't matter whether or not it's in the Constitution, whether or not it's written down in law, or whether or not it has been litigated in the past. He tried to do it, nobody stopped him, therefore he can do it.

We are finding out in real time that the president can actually do a lot of things, simply because nobody is stopping him.

Fair, but I don't think it's likely that SCOTUS would invalidate any of Trump's presidential pardons, assuming a future president decided to prosecute someone he pardoned. I doubt even the liberal members of SCOTUS would want to touch that.

If you want to prosecute someone who has previously been pardoned, then you'll have to figure out how to get the courts (that is, the people who would be doing the actual prosecuting) to ignore some of the highest rules by which they operate.

I'm not saying that that could never happen, but a) it sure sounds like an uphill battle and b) it's not the same thing as the president (one person) doing whatever they feel like regardless of the law.

I don’t think these blanket pardons are a good thing at all, but an amendment is needed to fix it.

We have somehow made it a habit to ignore the inconvenient parts of the constitution when they create problems, rather than going through the enumerated process to amend them. Yes, it’s hard to amend the constitution, but that’s the point!

There would still be a valuable public record produced by the investigation and court proceedings. Going after pardoned criminals is absolutely something the next administration should do. (We have zero precedent for preëmptive and blanket pardons in our courts, for example.)

Ex Parte Garland was decided in 1866

“The power of pardon conferred by the Constitution upon the President is unlimited except in cases of impeachment. It extends to every offence known to the law, and may be exercised at any time after its commission, either before legal proceedings are taken or during their pendency, or after conviction and judgment.”

Nobody is going to waste their time investigating crimes that can't be prosecuted.

You can't pardon violations of State law though. There may be plenty of offenses to go after. Vindictiveness is required at this point.

Only a constitutional amendment could allow the executive to declare war, or regulate trade, or control funds, or countless other unenumerated or explicitly disallowed powers. But if those rules are broken, we should still follow the rule that says the executive is immune from punishment and can declare anyone else forgiven? If that's the case there's actually only one rule: the executive is king. You can wipe your ass with the rest of the constitution.

The current USA opposition party doesn't really do anything when they actually obtain power. They bark a lot when they're out of power, but as soon as they are back in power, they just go limp, forgive and forget, for the sake of unity or something.

I don't think he's saying people who do that right now will be prosecuted. I think he's just saying that it will become illegal so anyone doing it then runs the risk of being prosecuted.

> The only way that this could be a federal crime right now is if the government starts prosecuting it under existing laws without any changes. I don't see that as likely.

Fully agree, especially since Kalshi just caught one of the editors of MrBeast's videos red handed (he was betting on the "What words will MrBeast say in his next video" market with 100% accuracy) and while Kalshi banned the guy the DOJ has shown 0 interest in doing anything with that.

It’s a federal crime once someone gets convicted for it. Without any precedent it will be up to the first case to lay out how existing law applies to new phenomena that may or may not be covered, depending on what a judge thinks of the arguments.

Schrodinger's felony

I understand he wants to deflect liability from his platform, but I guess I have to concede that it seems like a legitimate defense. We allow the stock market to exist even though insider trading can happen and it's (I think?) not Nasdaq's or NYSE's responsibility to pursue that. We have a legal system for that.

I think there is still the debate to be had whether prediction market enable too much criminal activity and insider trading compared to traditional stock markets and therefore need to be limited for pragmatic reasons (i.e. the legal system can't keep up), but that's a different discussion.

The Kalshi CEO should put their considerable wealth into bets on Kalshi that this will happen. I'll wait.

We have a situation where selective prosecution is used to command loyalty while the ringleader has been immunized from any kind of legal consequences by the Supreme Court, 6 of whom were appointed by said ringleader. Pardons are pretty openly sold now. It's cheaper to rip off the government then pay a fraction for a pardon, erasing any fine or repayment.

I bet there are lower level staffers who are profiting off inside information on prediction markets. Maybe some will be made an example of. I won't hold my breath.

But all the big insider trading is occurring in securities markets, particularly with oil futures and SPY futures. It's reached the point where no professionals trust the futre oil prices at all and and the physical oil prices differ from the future price by as much as $60/barrel. We've had $1b+ bets on SPY futures minutes before market-changing news. We don't know for sure who's doing this but my guess is that it's at the highest levels of the administration.

This DoJ is actively working to protect actual sex traffickers from accountability. What makes this doofus think they will ever investigate their own friends for insider trading?

Ok, but isn't the idea that prediction markets surface private knowledge a big part of the defense as to why they shouldn't be treated as illegal gambling?

So like, which is it, is insider trading expected, or are these just gambling sites that should be illegal in many jurisdictions?

Yes. This argument doesn't even apprehend insider trading laws on regulated securities markets in the US, where the crime is about theft, not fairness.

Correct. This is an important distinction.

Matt Levine has a good take on this. His informal, distilled definition is essentially:

- There is a time gap where insiders know something material and the public does not.

- Someone with access to that material nonpublic information, who is not supposed to use it for personal gain, trades on it anyway.

- That conduct is treated by courts as a deceptive scheme against the less‑informed trading counterparty and against the information’s rightful “owner.”

In other words - you profit at another person's expense (e.g. stealing) because you have information and the other person doesn't.

Two scenarios:

(1) a US Naval Officer knows about a strike 24 hours before it happens and places a bet against someone who doesn't have knowledge about the strike.

(2) Neither a US Naval Officer knows about a strike 24 hours before it happens and someone who doesn't have knowledge about the strike do nothing.

Scenario 1 is (or should be) illegal because the officer is using the information for personal gain, when the information was explicitly given to them for national defense reasons (thus violating the rightful owner clause).

Scenario 1 is illegal because it gravely violates military secrecy laws.

That wasn't my point but okay.

I'm not disagreeing with you!

> isn't the idea that prediction markets surface private knowledge a big part of the defense as to why they shouldn't be treated as illegal gambling

No. Their defense is that they are a gamified platform for futures contracts and hence should fall under CFTC regulation.

The CFTC also cracks down on insider trading, but it took time for them to write regulations to catch up with prediction markets.

It is now a priority [0] and they have just started a paid whistleblower [1] programs specifically to catch insider traders within prediction markets.

[0] - https://www.lw.com/en/insights/new-cftc-enforcement-director...

[1] - https://www.whistleblower.gov/whistleblower-alerts/Insider_T...

On the Polymarket homepage right now, one of the featured markets is whether or not Bitcoin will be up or down over the next 5 minutes. It's hard to justify that as anything more than illegal gambling.

I find prediction markets to be interesting on two fronts:

1) They like a really good way to determine the probability of something happening, which is interesting for events like elections

2) It provides an avenue for smart bettors to take advantage and sharpen their skill, whereas they get severely limited or banned from traditional sports books

However, it seems like all incentive structures for the markets and consumer behavior will steer these things to degenerate gambling.

Polymarket is not CFTC regulated, it's considered illegal in the US. CFTC does not allow betting on securities prices. Cryptocurrency is a bit of a gray area because it's not considered a registered security.

N.B. it becomes a bit frustrating to talk about financial and regulatory things on this site because the level of knowledge is generally "I read some articles on social media about markets" level.

> Cryptocurrency is a bit of a gray area because it's not considered a registered security

Additionally, the SEC and CFTC guidance on what digital asset can be treated as a security and what can be treated as a commodity was only released a couple weeks ago [0].

Stuff is changing rapidly so it's best to keep an experienced regulatory lawyer on retainer.

> N.B. it becomes a bit frustrating to talk about financial and regulatory things on this site because the level of knowledge is generally "I read some articles on social media about markets" level.

Yep. It is what it is.

[0] - https://www.morganlewis.com/pubs/2026/03/crypto-clarity-sec-...

> Their defense is that they are a gamified futures contracts and hence should fall under CFTC regulation.

That might be the defense. They are inherently designed to leverage insider trading though. I made a top level comment with links/resources that argues why.

Prediction markets don’t need to surface private knowledge, they can surface sophisticated interpretations of public knowledge. They are certainly gambling if you’re an unsophisticated rube (which is most of the users).

How does one "interpret" public knowledge to time bets so accurately right before Trump's announcements?

I mean that's why insiders are being investigated right?

But sometimes the answer is more difficult than it seems. Is a mid level military officer an insider? If you overheard a conversation on Capitol Hill are you an insider?

First, you’re describing the insider trading that is not permitted.

Second, the majority of prediction markets are predicting utterly mundane things like sports. The tiny number of news grabbing markets are not representative.

Prediction Markets, unlike many gambling sites, create a marketplace for odds. There's no house taking positions like in certain casinos or on DraftKings. Market makers offer shares in Yes and No while bettors buy and sell these odds to each other or to market makers.

when have we ever defined gaming/gambling as 'a thing where the house takes a rake' ? I don't understand this argument and it always feels disingenuous when brought up.

Er it's not. Gambling where the house takes a cut is considered a form of commercial gambling and is often made illegal or has stipulations applied to it.

If you're asking about why prediction markets fall under the CFTC, this is actively evolving but generally prediction markets are considered to be under the CFTC because they can be used to hedge against events.

For example if you're trying to do business in Oman but you're worried about Iran tensions spilling over, you could take a Yes position on an Iran conflict bet as a hedge. You may lose business but can make some of it up in the hedge.

"Gambling" the concept legally is very complicated and has a lot to be understood, so I'd suggest doing some searching or LLM asking if you want an intro on philosophical definitions or the legal landscape.

This is gibberish.

You're not providing actionable feedback.

You have managed to conjure a definition of "gambling" that excludes casino blackjack.

I didn't actually define gambling? I just said it's complicated. I just mentioned that if a house takes a cut this is a form of regulated commercial gambling, distinct from social gambling.

There's a body of legislation and legal precedent that actually defines gambling and how that's distinct from markets.

I'm not really sure what position you're taking but taking a rake can certainly change the legality of an activity; in California, playing poker in private is considered a social game and is legal, _except_ if party is taking a rake.

yeah a social _game_, not a commodity pork bellies futures market.

Legally, they have to disclose all their probabilities (under most regulatory regimes).

If all one cares about is the accuracy of predictions (i.e. setting aside value judgements vis-a-vis society or fairness), it does seem like "insider trading" should make prediction markets more accurate.

It makes them more accurate at the time the insider places the bet. But to maximise profit, they are incentivised to misdirect before they place the bet (and worse still from society's perspective, are incentivised to take counter-intuitive or downright harmful actions to profit at the expense of people who bet on the view that it made no sense for them to do that)

How does this trade work? Nobody knows who the insider is, they only see market direction.

You are a spokesperson or decision maker for an entity which is bet on, like a sports team or the government. You publicly indicate that you are going to do one thing (probably the thing that makes most sense), so the market bakes that into their assumptions and offers favourable odds for bets on doing the other thing. Then you place your bet shortly before you do the other thing.

(it's true that low level insiders might have limited influence on the actual outcome, but the current suspicion with prediction markets is that some of the participants do have that influence, or are being intentionally helped by people that can)

This gets into game theory and doesn't follow a predetermined flow like you're suggesting.

It's a bit like playing poker...does the guy who just went all in have pocket Aces or not?

It’s not really a game when one player gets to decide the outcome. In poker, the guy who went all in can’t peek at your cards and swap out his hand at the last second.

It really isn't at all like poker and really is a lot like the predetermined flow I'm just describing. Prediction markets regard the actions of politicians, sportspeople or businesspeople as indications of their wider goals for the country/team/business, not bluffs to try to influence their betting action. If a company says they're planning to IPO this year, everybody reasonably assumes that means the board want to make the IPO happen, not that they've already decided against it but reckon they can make a decent amount of spare cash anonymously betting against it happening on Polymarket

Agreed. So who are the outsider chumps taking the other ends of these bets? At this point, it doesn’t make sense to participate unless you’re an insider.

You can be an outsider with expertise, in which case you can still beat the non-expert outsiders.

So now who are the non-expert outsiders and why would they bet? Outsiders who think they are experts but are wrong.

Donald Trump Jr. is a "strategic advisor" to Kalshi, and is on the advisory board of Polymarket. Fed chair nominee Kevin Warsh holds a stake in Polymarket. CFTC Chairman Michael Selig, a Trump appointee, has advocated for prediction markets, and wants to put the CEO of Polymarket on an advisory committee. David Urban, a lobbyist who worked for Trump, was hired by Polymarket.

If there are any prosecutions, it won't be anyone in or connected to the administration. Even if these groups weren't in bed together, the fact that the administration has obviously been engaging in insider trading, and the DoJ hasn't done anything about it, makes it clear nothing will happen to them in the future either. The door to the vault is open and they're casually walking out with the public's money falling out their pockets.

One could hope DOJ would prosecute illegal gambling and preying on vulnerable people but anyways..

“If you commit insider trading on Kalshi, that can and will at some point be a federal crime. It is a federal crime, I actually do expect the DOJ to prosecute some of these cases”. I'm guessing that “some point” is sometime after Jan 20th 2029.

You give the Dems too much credit.

There was a downward trend during the Biden years [1] but "both sides same" is not even a little bit true.

[1] https://www.citizen.org/article/biden-doj-2024-corporate-cri...

Ok calling this out. Both parties are involved in crimes. An example is both party's are involved in supporting Israel's fascist objectives.

Just because there is less reports of corruption in the past by dems doesn't change anything. Corruption extends beyond parties, its not a political problem. Its a human problem.

I don't expect to see much change when the dems come back into power, albeit, it be less apparent and of a different nature, I.E more indiscriminate surveillance and less racial profiling ..

There is some kind of cultural thing going on that transcends the party's IMHO that's keeping this problem going.

How many people were jailed by Obama's DOJ for 2008 crash?

That wasn’t insider trading. You’re changing the topic.

No, I was commenting on the current administration's corruption. I don't think most previous Republican administrations would have tolerated the type of insider trading we have seen from people close to the administration. It goes beyond ideology, turning a blind eye to this behavior among your subordinates is a sign of weak leadership and poor management.

If they’ve been fine with Congress trading stocks on insider knowledge forever why would this be any different?

Because the law protects members of Congress, not

>people close to the administration.

I think it’s naive to pretend they haven’t been doing the same thing all along. The Trump admin simply has more options available to them with crypto and prediction markets. And their egos are too big to bother doing it quietly.

This is actually a good example of this not being a partisan issue. A congressional stock trading ban is one of the few issues that doesn't break down by party lines. Both Republicans and Democrats have put forward bills to ban it and the percentage of the population in support of such efforts is very similar between Republicans and Democrats.

I'm also not going to defend Congressional stock trading. I think it should be banned. But there are some differences about who is doing the trading/betting, what specifically they are trading/betting on, and what that information communicates to the public. There's a fundamental difference between a random staffer betting the US will attack Iran on a certain date which becomes public immediately compared to a Congressperson themselves buying stock in a weapon manufacturer in the leadup to an attack knowing the purchase won't be disclosed to the public for up to 45 days.

Like I said, I would be against both, but it's much easier to justify Congressional stock trading than the insider trading we see on these prediction markets. Afterall, it isn't like Congress is moving to remove all insider trading legislation, so there is some recognition of nuance here even if they give themselves more leeway than we would want.

What proof do you have that there is a difference between the Team Red and Team Blue, other than your not on the team you’re railing against.

For example, given Nancy Pelosi’s effectiveness as an investor, she was effectively a highly successful day trader with a side hustle as a representative of her constituents.

Framing this as a Left v Right, is at best, naive.

>What proof do you have that there is a difference between the Team Red and Team Blue...Framing this as a Left v Right, is at best, naive.

You're responding to a comment that explicitly said I wasn't doing that. This is not Left vs Right, it's Trump vs everyone else.

Your bias is blinding you. The System is corrupted. Full stop.

How do we know? Look who is in the WH. How can a fair and just system lead to that? You’re failing for the “OMG! Look at him!!” narrative. A narrative brought to you by the people whose incompetence and negligence led to Trump. A narrative that distracts from their failures. You should be asking: How did we get here? Who is accountable? But you’re not.

Trump's second-term clemencies so far have forgiven criminal debts of more than $1.5 billion. That's over 2,000x the amount amount eliminated by Biden's pardons ($680,000).

These pardons go to convicted criminals who have ties to Trump and his administration, or who have donated significant sums to Trump.

It is very obvious the current administrating is the most corrupt administration in modern history by several orders of magnitude.

https://www.cato.org/blog/embarrassment-riches

And what of Pelosi and the like? The problem is, you’re not able to measure what you cannot see.

For example, the obvious… Epstein Files. That went on for how long? Involved hundreds if not thousands of (mostly) men of power. Bill Clinton comes to mind.

Just because you couldn’t see the corruption doesn’t mean it wasn’t there.

Hey now, you don't to be divisive do you?

Well... it is a felony.

for regulated things it is, if you get caught, and if anyone is looking or gives a shit

I'm guessing it's Trump insiders who are busy making bank on inside info. Some of them just happen to be big investors in Polymarket and Kalshi. There's no way they are getting investigated, let alone prosecuted, by this DOJ.

At most some low-level flunkie will get named and slapped on the wrist.

Can I bet on this?

Oh, come on. The DOJ doesn't prosecute _child rape_ if you're a protected class. And all these insider traders are a protected class.

Translation: "it's not our problem"

Zero chance. This country has become an absolute joke of corruption, especially anything related to insider trading.

I agree the country has rampant corruption, but I disagree that the US DOJ should be pursuing insider trading on these markets.

Why should my tax dollars be spent on helping a bookie run their gambling business? Insider trading laws and prosecution in the financial markets makes sense, because the fair and impartial enforcement helps all of our economy, and allows capital to do its job investing in productive ventures.

These prediction markets are not that. They aren’t sources of investment for a productive enterprise, it is pure gambling.

Why should the US government spend money making sure people can gamble? If people want their gambling to be fair, they can pay for their own enforcement.

I like the idea of insider trading running rampant on these platforms. Once people realize that the other side of their bet knows the outcomes in advance, maybe they will stop betting their money on these platforms and they can just die.

> Why should my tax dollars be spent on helping a bookie run their gambling business?

I mean, current laws do exactly this. The FBI has done investigations for major sports betting sites related to players throwing or fixing games, etc. If you commit fraud on a sportsbook you absolutely can go to jail.

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