How does InTrade deal with insider trading?

InTrade CEO John Delaney (in 2007):

Insider trading is one of the wicked problems, perhaps. Intrade is about providing the best predictive information. If insiders have information, then getting that information reflected in the market increases the quality of the information. I know this is not the conventional view concerning insider trading, and I am not arguing wholesale adoption or acceptance of insider trading. But we all know that, in the real world, insiders trade on inside information. We have even had markets on insider trading. Our view is to get the best information available into the market while we make sure there is some fair protection for outsiders.

As I said, the problem is that this view is very unpopular among event derivative traders.

APPENDIX: Economic arguments in favor of insider trading.

7 thoughts on “How does InTrade deal with insider trading?

  1. Medemi said:

    For those who are interested in all dimensions of the truth.

    Quote from betfair forum :

    Vital Spark
    26 Jul 09:24

    Panorama BBC1 on Wednesday 30th July at 9pm………………………..

    ”Racing’s Dirty Secrets: Nearly six years after its expose of corruption in horse racing, Panorama returns to the sport of kings to investigate the world of betting. Presented by Paul Kenyon”. ………………………………………………………………………………… This should throw some light on the subject? It appears the BHB tried to suppress some of the content.

  2. Medemi said:

    If this is going to be one of my solo tours, then fine. But remember, I will not be losing money to insiders in the long run. You will.

  3. Chris F. Masse said:

    @medemi: The views of some economists is very different from the views of some (or most) traders. That’s the lesson.

  4. Jason Ruspini said:

    Note that the familiar argument for not regulating against manipulation suggests that one *should* regulate against insider trading. The argument roughly goes that manipulation ultimately increases market accuracy because traders are attracted to markets “subsidized” by manipulators, and this liquidity eventually leads to greater accuracy. Therefore traders would be less likely to participate in markets where insider trading, a negative subsidy by this logic, is allowed, and this would ultimately decrease liquidity and accuracy. You could argue that the decreased long-term information due to discouraged liquidity is less significant than the initial short-term information gains due to insider trading, but then wouldn’t the increased long-term information due to encouraged liquidity be less important than the initial short-term information loss due to manipulation? Maybe not, maybe severely so, depending on the details of your assumptions, but there is certainly a tension here.
    Also, it would make a difference if insiders were required to immediately report their trades. That might make it easier to infer “information” from price action and mitigate damage to other traders, but as we know with current insider reporting, it’s not straightforward to design a strategy based on insider activity, which includes corporate buybacks.

  5. Medemi said:

    Thanks for putting it up again, Chris.
    Let’s criticize some of the arguments put forward to legalize insider trading.

    Some economists and legal scholars argue that laws making insider trading illegal should be revoked. They claim that insider trading based on material nonpublic information benefits investors, in general, by more quickly introducing new information into the market.
    First of all, investors do not benefit from trading against people with un unfair advantage, they’ll lose money. Secondly, WHAT new information ? The last time I checked it was unavailable to the public. Surely we’re not suggesting that every time a stock goes down there’s some bad news about a company ? Well, they are suggesting it, because they haven’t got a clue how markets work.

    You want more insider trading, not less. You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that
    WHAT awareness ?

    Other critics argue that insider trading is a victimless act
    When I take one penny out of everyone’s account, THAT will be victimless crime, but it’s still illegal. I don’t have to tell you why. But I have to tell the braindead that.

    Legalization advocates also question why activity that is similar to insider trading is legal in other markets, such as real estate but not in the stock market.
    Because, you little silly boy, when I am a buyer or a seller it is my responsibility to be wary, question/ask for the other parties motives etc. In the stock market, or when I trade the prediction markets, I don’t get that opportunity. My opponent is anonymous and wishes to remain that way.

    That’s it, I don’t feel like offering any more arguments against all of this nonsense.

  6. Medemi said:

    The only reason why markets hold up reasonably well in the presence of insiders is because people are unaware of the damage insiders cause to their wallets. They prefer not to know. Only an experienced trader, who has been hit a couple of times, and knows he has been hit by an insider, will admit to the problem. So this becomes a long term problem for operators. And it probably becomes a problem for them before it becomes a problem for their customers. There’s this little voice in my head that keeps telling me betfair would love to come on here and confirm this matter.

    The real issue is not the presence of insiders per se, it is how many we have and the impact they have on the marketplace. Regulation will see to it that the number of insiders will be contained, which is what we need.

    We can’t have an insider (a random individual who accidentally gets hold of some very specific but valuable piece of information) opening an account, betting $1,000,000 and ripping the market apart, causing damage to the entire industry. Therefore we need limits on new accounts. Let them bet $1,000 and get away with it, for all I care. It’s better than persuing someone who just won $300,000 and left behind a path of destruction.

    Limited stakes on new accounts will act as a discouragement for insiders and provide me with the protection I need. It will induce trust in the marketplace and improve liquidity without having a negative impact on market accuracy. There’s still something wrong with this picture but it’s very close to a practical and effective solution.

  7. Medemi said:

    – Since when did the human race become interested in the truth ? 😀
    – I thought it was the wisdom of the crowds we were interested in, not the wisdom of the cheats.

    “We level the playing field and sacrifice price accuracy”

    Besides, I think you’re “overreacting”.
    1. You’ll never get rid of the insiders completely.
    2. My proposal gives them some room while keeping the opportunists out.
    3. When we embrace the insiders you should expect a lot of market manipulation. How does that help in our quest for the truth ?
    4. Your typical rotten insider won’t be moving the prices because it’s not in his interests. In stead, he will buy himself time and drip-feed his bets into the market. Only widespread “inside” info (rumors) will move the markets, at which stage we’re close to entering the public domain anyway.
    5. Markets which are very susceptible to insider trading shouldn’t be offered in the first place. They will only result in false markets (see your own link). That is, if you’re interested in the truth, like you are. And the rest of the human race. 🙂

Leave a Reply

Your email address will not be published. Required fields are marked *