Unlike most markets, insider trading isn’t always a bad thing on a prediction market. 

In fact, sometimes it’s good to have insider information, because the primary role of a prediction market is to predict the outcome of a future event. You need informed traders for that, and nobody is more informed than insiders. 

“If your interest is in getting the most information into the market, then you’d want insider as well as outsider information,” said Tom Rietz, professor of finance in the Tippie College of Business and board member of the Iowa Electronic Market, the original prediction market, which made its first predictions in 1988.

But Reitz said that doesn’t mean insider information doesn’t pose problems. If an investor is hedging, for instance, insiders can skim profits and cost them lots of money. 

Similarly, insiders can profit from uninformed traders, which is the primary concern about insider trading generally. 

But Rietz said the real issue with event driven markets isn’t insider information.  

“It’s insider control,” he said. “If one person or a small group of people can control the outcome, then all they have to do is buy a bunch of contracts that they can make the pay off.”

Then, he said it’s the same as an athletes betting against themself and throwing a game.  

“The markets may appear accurate in this case, but they’re really unfair,” he said. 

Media contact: Tom Snee, 319-394-0010; 319-541-8434 (c); tom-snee@uiowa.edu