The degree to which existing regulations on political intelligence apply to PredictIt remains ambiguous.
PredictIt’s Terms and Conditions states:
The Website is not a stock exchange, and there are no controls on market manipulation or trading on the basis of “inside information”. You confirm that you fully understand the risks that this entails, or, if you do not understand these risks, you agree to obtain appropriate independent advice before using the Website.
John Aristotle elaborated on the issue in a 2016 interview on the Pollsters podcast, suggesting that the rules governing insider trading in stock markets do not apply to political prediction markets:
Aristotle: Prediction markets function as well as they do and are accurate as they are…
because…these markets, like any markets, attract people with superior information. In the financial stock market, it’s called inside information….
Pollsters: There isn’t any such thing as insider trading, right? I mean, campaign operatives and reporters and pollsters can all participate in these markets with all the inside, background information they have?”
Aristotle: Yeah, experts…that got a little bit of advantageous information…whatever it may be…
John Aristotle’s permissive view is supported by the lenient approach regulators took to insider trading on Intrade. Despite the crackdown the site ultimately experienced, individual traders were never sanctioned for insider trading, even when prominent U.S. media were reporting that traders “competed for inside information” and “employed the sort of bucket-shop tricks that might have gotten them handcuffed by the Securities and Exchange Commission if they had tried them in their day jobs.” Nor was Intrade or its management sanctioned despite their less-than-subtle statements to the press that appeared to welcome insider trading on the platform.
Certain political insiders, however, may not be immune. The STOCK Act (Stop Trading on Congressional Knowledge Act of 2012) prohibits Congressional staff from trading on material, non-public information. PredictIt does not take a position on whether or not the STOCK Act applies to its platform; it simply directs “questions about applications of the STOCK Act or other ethics rules” to the House or Senate Ethics Committees.
So far, it appears that insider trading and conflicts of interest on PredictIt are entirely self-regulated. The power of self-regulation, in my anecdotal experience, can be quite powerful even with compelling opportunities to trade on privileged information. A friend of mine who was clerking for John Roberts, for example, decided not to open an account on Intrade despite learning before the news cycle that Roberts would be named chief justice.
During the 2016 presidential elections, some campaign aides voluntarily stopped betting on PredictIt, while others continued to trade. During the period when I was the policy coordinator on the Huckabee and Trump campaigns, I was transparent with my colleagues that I was trading on PredictIt, but did not announce my bets publicly.
Notable is that Corey Lewandowski acknowledged on Twitter one month after resigning as Trump’s campaign manager that he was betting on PredictIt—a period when he was receiving severance pay from the Trump campaign. Lewandowski’s tweet generated ethical concerns within the PredictIt community about campaign aides and candidates trading on inside information. PredictIt’s official Twitter account itself, however, engaged Lewandowski’s tweet, responding, “not too late! Tons of great markets to get in on!” In an environment in which former senior Trump campaign aides are under unprecedented legal scrutiny, Lewandowski, to my knowledge, has not been sanctioned for trading on PredictIt.
Against this backdrop, I am not aware of any instance in which someone has faced legal difficulties because of their trading on PredictIt. As a practical matter, does insider trading routinely happen on PredictIt? Almost certainly. Indeed, a reliable source told me on background that Capitol Hill represents one of the highest concentrations of PredictIt users.
Does it matter?
My general view is that inside information and intelligence is overrated. In a long-run competition between skilled, disciplined investors using only open source information and insiders with privileged information, I’d bet on the former. My intuition here is supported by the results of a forecasting tournament sponsored by the Intelligence Advanced Research Projects Activity, the intelligence community’s research division, between 2011 and 2015 where top forecasters from the Good Judgment Project outperformed by about 30 percent intelligence community analysts with access to intercepts and other secret data.
Even in situations where investors do have access to actionable inside information, the $850 limit precludes a small group of betters from substantially distorting market prices.
That said, I have no principled objection to insider trading[1] and seek to profit from it whenever possible. I freely share inside information with my private group whenever legally advisable and actively recruit to the group those who are willing to do the same.
I
am skeptical that traders will face legal repercussions from insider trading.
Not only is it largely unenforceable, but, particularly on sites like PredictIt
that have an academic purpose, one of the very reasons prediction markets are
of interest to researchers is because their prices reflect not only public
information but also “scattered
private information held by traders.”
[1] On the ethics of insider trading see, Machan, T.R. 1996. What is morally right with insider trading? Public Affairs Quartlery 10:135-42.; Mann, H.G. 1966. In defense of insider trading. Harvard Business Review 44(6): 113-22; Robert McGee, “An Economic and Ethical Look at Insider Trading” in Paul Ali and Greg Gregoriou, ed. Insider Trading Global Developments and Analysis, CRC Press, 2009, pp. 35-48; Jeffrey Miron, “An Economic Defense of Insider Trading,” Atlas Society, 12 February 2012, available at: https://atlassociety.org/commentary/capitalism-and-morality/capitalism-morality-blog/4932-an-economic-defense-of-insider-trading