A Contrarian View on Insider Trading

We all know that insider trading is wrong . . . isn't it?

I'm no longer sure, given new possibilities emerging in technology. The standard definition is where a person has access to non-public information and uses that for financial advantage. The classic case is foreknowledge of a corporate decision or quarterly result, then using that to buy stock or options.

But betting platforms like Polymarket and Kalshi add a new dimension. There have been cases from the banal (Bad Bunny's Super Bowl set list) to the deadly (Maduro's arrest). In these cases, nominally non-financial information asymmetry was converted into financial results.

But isn't that what an investigative journalist does? They seek information that is nominally hidden - often via sources who are not authorized to disclose the specific information and sometime via sources that are actively breaking the law by disclosing the information. These journalists are paid for doing so, and if the reveal is significant enough, they get a book and movie deal. Who knows if they pay their sources.

Would we want to restrict this free press? Of course not, but why not? Because the press serves the function of breaking down the walls between the powerful and the rest of us. The threat of malfeasance or two-faced actions being revealed is one of the pillars restraining the powerful.

Consider information being leaked via a betting market (more correctly viewed as an information market) and AI bots accurately discerning these as leaks. In this case, the information market becomes the investigative reporter and check on power.

Would that not be a good thing?

Inadvertently Misleading

Imagine you are a corporate executive responsible for producing a quarterly report. Imagine further that you are of the highest moral caliber and genuinely want to be as transparent as possible.

You would be surrounded by corporate legal counsel and public affairs wordsmithing every statement, assuring compliance with Sarbanes-Oxley et al and assuring that nothing you say can be misconstrued. No matter how hard you - and they - try, the message will inevitably be diluted.

You might have a concern that the numbers on a particular initiative, while looking positive, are actually misleading and the project is going to be in trouble. You don't have firm evidence - it's just a hunch born of your long experience. There is no way that minority opinion is making it into the report.

But maybe the project managers under you bet on polymarket. The information will probably get out.

Abstract this further.

Greater and more widespread transparency would likely ensue. Negative consequences of this development are certain. But it is possible that society would be better off for greater transparency.

National Security

The argument for national security brings higher stakes, but not necessarily a different outcome. What is the bar for treason or real wrongdoing? Edward Snowden clearly violated many laws with his reveal of US national security documentation. But one could argue that what he revealed was whistleblower information, since the US government had been clearly violating the intent of laws meant to enable the fight against terrorism. This is not a simple case, and although I lean towards granting him a Presidential Pardon, I'm sure that there are very good arguments that his crime should not be excused.

The point is that we Americans are certainly better off knowing that our government was acting very badly. I have little doubt that the reveal resulted in greater restraint.

Speaking of which, I am eternally surprised and concerned that nothing visible has come of these revelations - especially while we salaciously revel in the Epstein files. What Snowden revealed is 10X worse than any likely Epstein revelation.

There are clear areas where national security leaks are unequivically bad. The Maduro arrest is one such case, given that it would have alerted the Venezuelan military of the operation. If we were facing a more sophisticated foe, then such a leak could cost many lives. Imagine an operation where we assist Ukraine with intelligence and guidance in executing a mission against Russian forces occupying their territory.

Imagine a President walking into a negotiation with a foreign leader for a peace or trade deal and that foreign leader had foreknowledge of America's bottom line position. The result is a bad deal for us and in the case of a peace talk, possibly more dead.

To Regulate or Not to Regulate . . .

Information leakage and usage is not a simple topic. Furthermore, the AI age will inevitably lead to more leakage and profit derived thereof. We must restrain ourselves from reactionary positions established in the past and look at the new land before us with fresh eyes that attempt to see further into the unknown implications of policy.