If it’s known that insider trading is allowed, wouldn’t that make some people more reluctant to bet? Would this reduce the liquidity of the market enough to be damaging overall?
Zvi mentions the insider trading problem in this post.
Limited Hidden Information
Insider trading of securities is illegal. This seems at odds with price discovery. If I know something you don’t know, then my not trading on it makes the price less accurate. One might suggest that allowing insiders to trade would make the price more efficient.
The problem is that it drives people away.
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In my experience with prediction markets, important hidden information other traders could know acts as an outright veto on the market. It might not do that if the market had enough ‘natural’ trading volume, but that’s a high bar to clear.
If it’s known that insider trading is allowed, wouldn’t that make some people more reluctant to bet? Would this reduce the liquidity of the market enough to be damaging overall?
Zvi mentions the insider trading problem in this post.