I am not sure why you are barring “insider” trading.

It is not because I have set up a market that I know more about the outcome than anyone else. Indeed, my knowledge should be reflected in the pricing of the original contracts. The market creator is not an “insider” in the “insider trading is illegal” sense—that insder is someone who trades on rpivate, market sensitive information.

Imagine, moreover, that I have a private market in which I am incentivising participants by offering the one who makes the most moeny in the market a prize. I might want to manage my own risk by trading the contract.

Can anyone explain the logic of not letting the market creator trade?

Thx

Tony

explain this a bit further

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check out my Inkling blog @ www.madinkles.blogspot.com

hmmm … OK.

Insider Trading is illegal on financial markets because it fleeces outsiders to the advantage of insiders. These insiders have private, market sensitive, information – like Goolge is about to bid for Apple. They know this will have, when known, some cosniderable effect on the share price; therefore, they trade in the appropriate direction before the stock price fully reflects the new information. The people thay have bought from or sold to are being fleeced, because they would not have traded at that price had they had the pertinent information. If a market allows this sort of behaviour to run rampant, it eventually dries up liquidity and only “insiders” are willing to participate.

But when I set up the market on Gyurcsány in Hungary – stay or go? – the situation is quite different. I set the initial price at 50/50, and this mroning I want to update my probabilities because of new information. Why should I not trade this contract?

Now on the question of managing my own risk. Imagine I say to the participants in a private market: “I have $1000 (real money) to distribute to you all in proportion to your trading gains over the life of the market. This gives everyone an incentive to aprticipate, and rewards information extraction. Now, I might see some obvious trading opportunities and want to have prices reflect those before someone else does – this menas I will be distributing more of the $1000 to myself, so allowing me to manage my risk.

If you stop insider trading, I can, of course, set up a “market making account” and a “trading account”. But I was wondering if there was some hidden logic to trying to stop market creators trading in their markets.

Tony

tcp, you are right; you have no inside knowledge of a political situation so it doesn’t seem right to bar you from trading in that market. however, given this is a public “do it yourself” marketplace and the founders of Inkling are not all-knowing :) , there are other markets where someone may indeed have insider knowledge and in that case we don’t really want them trying to manipulate the market. Thus we made the blanket decision of not allowing you to trade in your own markets.

Of course as you say you can have two accounts; one for market making and one for trading, but at least if you see the message about insider trading it will make you think twice about trading in a market where you may indeed have insider knowledge in the future.

thanks, adam. makes sense as a default.

tony

you are right; you have no inside knowledge of a political situation so it doesn’t seem right to bar you from trading in that market. however, given this is a public “do it yourself” marketplace and the founders of Inkling are not all-knowing :) , there are other markets where someone may indeed have insider knowledge and in that case we don’t really want them trying to manipulate the market. Thus we made the blanket decision of not allowing you to trade in your own markets.

Of course as you say you can have two accounts; one for market making and one for trading, but at least if you see the message about insider trading it will make you think twice about trading in a market where you may indeed have insider knowledge in the future.[/quote]
Does the equation of “insider knowledge” with manipulation of a market assume that the market’s design (in other words, the language of the contract) would be somehow sub-optimal? Because otherwise, what would be the harm in allowing someone with “insider knowledge” to act on that knowledge by buying or selling stock?

If insider trading were allowed, a stock’s price would be a more accurate expression of the probability of the related event to occur than if insider trading were disallowed. So, if Inkling approves the language and suitability of a given market, why limit insider trading? The earnings on a market one created himself are the reward for sharing that information with the market, aren’t they?

I think it opens up too many possibilities for

1) Manipulation (i.e. I know the outcome is going to fail but I price it and word it to imply success… then swoop at the end)
2) Outright fraud (i.e. I close out the market the opposite way or I interpret a vaguely subjective clause to my advantage… See the Middle East Surprise market for an example of gross subjectivity ripe for fraud)
3) Free money based on initial pricing (I price something at 50/50 but I really think the odds are 70/30… I buy the price to the “correct” price)

You can address number 2 by good policing from inkling and number 3 could be addressed by having some sort of “cooling off period” but I see no way to stop #1…

Therefore here’s my suggestion:
Allow insider trading (assuming that the inkling folks are willing to police the markets to address number 2 above) but force a 2 day cooling off period before insiders can trade AND allow for inkling to bar insider trading at their discretion (for markets that could potentiall have significant insider knowledge… like the Jones Soda market for example).

Another approach is to have a “Insider Trading Allowed” checkbox, with the result prominently listed with the market information: “Insider Note: This market allows the market manager to participate” or “Insider Note: The market manager is barred from trading in this market.”

Then “outsiders” could decide whether they want in or not. Particularly in a somewhat subjective market - for example, what exactly counts as “Other” in the October Surprise market? - seeing that insider trading was allowed would be a red flag. On the other hand, if a market is paying off at the spot price of crude oil as determined by a particular market on a particular day, then there is much less scope for manipulation or fraud (1 and 2 on laxrulz777’s list).

The “free money” problem would still exist, but a cooling off period could help with that problem. Maybe 7 days instead of 2.

I like this idea…

I vote in favor ;)

I agree, and I think the impact it would have on the more subjective markets (like those already mentioned) would be very positive.

I like giving people the option when they create the market;

we do look at the markets before they get published obviously so it should be very clear whether or not taking advantage of insider trading re: what laxrulz points out would happen or not. That said, who’s to say the anonymous user isn’t someone actually in the know – we would certainly not know otherwise.