Full Insider-Trading Ban Would Harm Prediction Markets
Academic research warns maximal rules could drain liquidity and erode price accuracy on platforms like Polymarket.
A new academic paper argues that a blanket ban on insider trading would damage prediction markets by driving away the uninformed participants who make those markets liquid and accurate over time.
Why It Matters
For crypto-native prediction platforms like Polymarket and Kalshi, this research adds academic weight to a regulatory debate with real commercial stakes. Researcher Balbinder Singh Gill warns that "the same insider trade that improves the accuracy of the price today can reduce the participation that makes the price informative tomorrow," according to CoinTelegraph. A maximalist prohibition could hollow out market depth, making odds less reliable rather than fairer. For bettors, thinner markets mean wider spreads and less confidence that prices reflect genuine probability. Gambling — including prediction-market speculation — always carries financial risk, and regulatory miscalibration could amplify that risk structurally.
Context
Prediction markets occupy an uneasy legal space: regulators typically treat insider information asymmetry as market abuse, yet these platforms derive their core value proposition from aggregating dispersed knowledge — some of it unavoidably private. As of June 2026, U.S. regulators have not yet issued definitive rules distinguishing permissible "informed trading" from prosecutable insider trading on decentralised prediction platforms.
What's Next
Gill's findings will likely surface in upcoming CFTC consultations on prediction-market oversight. Whether legislators distinguish between harmful manipulation and price-informative asymmetry will determine the operational model for the sector through the next regulatory cycle.
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