Liz’s view
Kalshi and Polymarket have either a massive insider-trading problem or the appearance of one.
It doesn’t really matter which. But my bet is that they’ll fix it — because it’s in their financial interest.
For starters, people don’t want to participate in a market they think is rigged. Military, political, and corporate insiders cashing in on things they have knowledge of drives off the users these platforms need to grow.
But the bigger motivation for self-policing is what Kalshi and Polymarket could become: key backbones to the biggest capital markets in the world. Today, a trader who thinks Home Depot will beat earnings estimates has to cobble together a clunky position: long HD, short a competitor like Lowe’s, maybe add some lumber hedges for comfort. On Polymarket, you just click “yes.” Home Depot can do the same to, say, hedge its exposure to lumber. Huge swaths of what happens in regulated financial markets today should be happening over there.
Polymarket is worth far more as the platform where companies like Meta hedge their future AI compute-pricing risk than as an OTB window for US black-op nighttime raids. The New York Stock Exchange, which invested $2 billion in Polymarket last year, will only be coaxed into acquiring a serious player in institutional finance. It will pay zero dollars to acquire a vibes casino.
Maybe that’s just the millennial finance reporter in me, but you knew what you were getting when you signed up for this newsletter — the idea that actually, this buzzy zeitgeist Geiger counter is more interesting as an enterprise-scale platform for institutional investors to express contrarian views on corporate earnings. (Some intellectual backup: Bloomberg’s Joe Weisenthal, our guest on Compound Interest this week, agrees with me.)
But to get there, Kalshi and Polymarket need to entice market-makers like Citadel Securities and Jane Street to take the other side of whatever bet these platforms’ vibe-surfing users want to make. Citadel Securities is intrigued by prediction markets, its president told me last month. But it won’t show up if it thinks insiders are across the table.
One caveat to this: I might be discounting a different incentive that Kalshi and Polymarket have, which is that they need to be right. Betting platforms have to call outcomes accurately or they’ll get dropped from the cable-news scroll, and insiders nudging odds toward correct answers help with that. It’s a real tension, and not a small one.
Still, companies aren’t good or bad. They follow incentives, which usually encourage them to chase profits and foist the negative externalities on the rest of us. This is a rare instance where it’s in their interests to do the right thing.
Notable
- “Do you have any… clue how much money Kalshi need normal long-term unprofitable retail gamblers like me to lose on Kalshi to PAY them enough fees to be worth $22bil valuation?” DraftKings co-founder Matt Kalish wrote on X, calling the company a “house of cards.”