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102 sats \ 5 replies \ @SimpleStacker 20h \ on: Insider Trading on Kalshi and Polymarket (Bloomberg, Matt Levine) econ
I had as conversation about this on Stacker News. @steakneggs believes that more insider trading on prediction markets is better (#1327248) because they philosophically view prediction markets' purpose as an odds-revealing mechanism.
I can understand the argument but I'm not sure I agree with it. Even amongst insiders, there may be different levels of insider information. If the market unravels to only the agent with the most private information, there won't be anyone to take the opposite side of a trade, leading to no price. Even if a less extreme scenario of only partial unraveling, it's not clear to me that the volume in the market will be enough to accurately approximate the real odds of an event.
In any case, it also calls into question the business model and financial sustainability of these prediction markets, because they make money off volume, which is at odds with the prevalence of insider trading.
If the market unravels to only the agent with the most private information, there won't be anyone to take the opposite side of a trade, leading to no price.
not sure I follow this. Explain? (having info is not the same as interpreting it, knowing therefore what it means... that's what Levine gets at in the piece. Obvs for binary bets, then sure, I see).
Isn't the point, then, that nobody knows that a particular trader knows...?
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It's a traditional unraveling argument.
It's only profitable for me to trade in this market if I have more knowledge (including the interpretability of the knowledge), than the average market participant.
Knowing this, I drop out if I have zero private info. This elevates the average level of knowledge among the remaining participants, which elevates the knowledge requirement to be profitable. Thus, the traders who have more limited info drop out. The process continues until only the most knowledgeable trader stays in the market.
It's true that no one knows exactly what others know, and the quality of their own info. So that's my scenario of partial unraveling. The remaining participants are those with the highest confidence levels of their advantageous knowledge. The question is, will that volume be sufficient to generate an accurate price prediction? There's also the question of whether the confidence which engenders participation is correlated with real information.
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hm... I see.
But then... why does anybody trade anything? On stock markets, but even more so betting sites? Are we all just all in a perpetual Lake Wobegon?
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Traditional answer is that the stock market is not zero sum. I think that's a satisfactory enough answer, but yeah the same information dynamics may be present in stock trading as well, which could explain the popularity of index funds
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It seems like you’d have to know how inside you are compared to the other participants, which I imagine most people wouldn’t know.
Also, lots of stuff just doesn’t have this issue at all.
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