Insider Trading in Prediction Markets: An Information-Participation Theory of Optimal Enforcement
papers.ssrn.com
Prediction markets live and die by information aggregation — but this paper argues insider trading poisons the well in a uniquely paradoxical way that demands a whole new enforcement theory.
Information Aggregation TheoryPrincipal-Agent ProblemMarket Microstructure TheoryGame Theory
Theory Briefing
- Prediction markets derive their value from price signals that aggregate dispersed public knowledge, making information integrity their core asset.
- Insider trading in this context is self-defeating: the trade that sharpens short-term price accuracy simultaneously deters ordinary participants from joining, collapsing long-run information quality.
- The paper proposes an Information-Participation Theory of enforcement, calibrating penalties not just on unfair gain but on how much a trade chills broader market participation.