People who run in-house, corporate prediction markets have told me that U.S. laws against illegal insider trading give them nightmares. The problem arises because a private prediction market typically generates material nonpublic information about the corporation that hosts it. If somebody misuses that information to time the purchase or sale of the corporation&#8217-s stock, liability for illegal insider trading could follow.

I plan to say a great deal more about this problem, and some proposed cures, in a paper I&#8217-m writing for the Journal of Prediction Markets. In very brief, I propose several strategies that should help to mitigate the risks that private prediction markets create under illegal insider trading laws:

• Segregate markets for traditional insiders from other markets.
• Broaden safeguards against illegal insider trading to reach beyond traditional insiders.
• Treat the market&#8217-s claims and prices as trade secrets.
• Set up decoy claims and prices.

Alternatively, of course, a corporation could simply make public the claims and prices of its in-house prediction market. Illegal insider trading laws only speak to material nonpublic information, after all. It seems very unlikely that any corporation would willing disclose so much and such probative information about its management, however.

[Crossposted at Agoraphilia and Midas Oracle.]

Previous blog posts by Tom W. Bell:

• Let’s Tell the CFTC Where to Go.
• Let Prediction Markets Fight Terrorism.
• Protecting Private Prediction Markets
• Building Exits into CFTC Regulation
• Getting from Collective Intelligence to Collective Action
• Quake Markets
• Presentation of Private Prediction Markets’ Legality Under U.S. Law