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Thursday links: insider nation, crypto parlays, and pre-IPO perps
Polymarket founder Shayne Coplan said in an interview last fall “it’s sort of an inevitability” that insiders will trade on prediction markets — and not necessarily something to be discouraged: “People having an edge in the market is a good thing,” he added.
With one caveat: “You need to curate them and be clear and stringent on where the line is drawn.”
A report on insider trading in prediction markets from ACDC (not the band, unfortunately, but the Anti-Corruption Data Collective) suggests one place that line should be drawn: markets on military and defense issues are rife with insider trading.
The researchers found that longshot bets on military and defense outcomes succeeded 52% of the time. That is far in excess of both the expected rate (less than 35%) and the next highest category (politician speech at 23.6%).
The timing is suspicious, too. “There is a noticeable spike in successful longshot betting just before these markets resolve,” the report adds.
The US military would presumably say this is not a good thing.
“Polymarket has become an inadvertent intelligence broadcast channel,” political blogger Brian Hopkins says.” He cites the examples of Polymarket account “Burdensome-Mix” telegraphing a covert military extraction and “Magamyman” telegraphing an airstrike. “If anonymous crypto traders can read these signals in real-time on a public blockchain,” he adds, “so can foreign intelligence services”
Paul Krugman calls this “a form of treason.”
Coplan, however, believes these markets have value. “People can get information that might be important for their safety, or their family, or their livelihood, or how the next week of their life is going to go.”
“I love OSINT,“ he adds of open-source intelligence. “It’s just an awesome use case.”
Reuters reports that traders shorted as much as $7 billion worth of oil (via derivatives) immediately before official announcements of a US-Iran de-escalation sent energy prices sharply lower.
The implication, of course, is that someone had advance notice of the announcements.
But $7 billion! Who trades $7 billion of oil futures on inside information??
We could soon find out, because the CFTC is reportedly investigating and it shouldn’t take long to follow the audit trail back to the individuals who placed the trades.
But the individuals who placed the trades must know that — and that Martha Stewart served five months of hard time for selling just 4,000 shares of ImClone systems ahead of an FDA decision.
Time served for selling billions of dollars of oil ahead of a military decision would presumably be much longer.
So, call me naive, but I find it hard to imagine that anyone in a position to trade oil in that size — almost certainly a professional trader at a regulated entity — would risk trading on insider information.
So here’s an alternative theory: they didn’t.
“The trades in oil and stock futures may not have come from an insider at all,” economist Rajiv Sethi speculates, “but from a quant fund that extracted the inside information from prior trades on Polymarket.”
In other words, their algorithms may have detected thousands of dollars of insider activity on unregulated Polymarket and turned it into billions of dollars of activity that looked like insider trading on regulated futures exchanges.
ACDC (not the band) warned of this: “Because activity on Polymarket is published openly but pseudonymously on the blockchain, high frequency traders can identify this possible insider activity and take advantage of it to increase their profits.”
If that’s what happened here — tiny Polymarket moving the giant oil market — it’s genuinely incredible.
And entirely legal.
Insider trading may be a Highway to Hell. But trading that merely looks like insider trading? That’s a fast way to get Back in Black.
Blockworks’ Kunal Doshi reports that comically short-term event contracts — forecasting crypto prices just five or 15 minutes ahead — have become hugely popular on Polymarket: they now account for close to 40% of Polymarket’s daily fees.
40%!
They also account for 74% of the crypto trading that happens on Polymarket. “Traders appear to prefer volatility and faster feedback loops,” Doshi observes.
I didn’t get why until he showed his math: “A trader buying YES at $0.50 across six consecutive five-minute windows could theoretically turn $10 into $640 within 30 minutes.”
In other words, it’s a parlay bet, but on one thing: six consecutive bets on bitcoin instead of bets on six different sporting events.
An NFL parlay takes all day to resolve. A bitcoin parlay resolves in 30 minutes — and not just on Sundays.
Unfortunately, these are the worst bets to make. On Kalshi, retail traders have lost an estimated $117 million on “combos” (their version of parlays) so far this year. In the much bigger market for sports parlays, retail bettors are thought to lose billions.
Predictably, bettors on Polymarket are doing no better. “Short duration markets are increasingly becoming a transfer of wealth from retail traders to professional algorithmic firms,” Doshi writes.
But people love parlays, and providing them is a good business, so we’ll probably see much more of it.
Doshi speculates that the next big category for Polymarket might be short-duration bets on sporting events. Why wait for the final score when you can bet on what it will be five minutes from now?
It’s not exactly the “truth machine” Polymarket promised us. But they do have bills to pay.
IPOs typically open late because it takes time for the order book to balance out, and the further from the IPO price the stock is going to open, the longer it takes. Cerberus was very far from its IPO price so trading didn’t begin until 1:05 pm.
This has always been annoying for bank and exchange traders who never know when a new stock will suddenly start trading, so they have to constantly check the indicated price that Nasdaq publishes. Usually it’s not super useful: $20 - $25 or something. Often, it’s unreliable, sometimes changing at the last second.
Now, however, traders can skip all that and look at the Hyperliquid-based perpetual futures (perps) exchange Trade.xyz instead.
Since Cerebras perps began trading on May 1st, they hit a high of $320 and a low of $200. From Sunday until this morning, though, they consistently traded around $300.
At 10 am the price shot higher to $370. At 1:05 pm, the stock officially began trading on the exchange at $350 and then hit $385.
An hour later, it was at $300 again.
In other words, the perps market had it right since Sunday evening.
Amazing.
And useful! Much more so than the official indications from the exchange, even minutes before the official open.
What will crypto come up with next? A five-minute market on perp prices, probably.
— Byron Gilliam
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