I plan to say a great deal more about this problem, and some proposed cures, in a paper I'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'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.]