Prediction markets want to be the news

21:17Liz Lopatto:So somebody knows what's in those abstracts and they're trading on that information before it becomes public. And this is a really well-known phenomenon and no one has done anything about it. So those are sort of two things that are involved. I think the third thing is that at this point, again, given the sort of limited enforcement resources that our government has, prediction markets just aren't big enough to really be on their radar yet.

21:44Nilay Patel:That's changing, right? It feels like the Trump administration is extremely aware of prediction markets and how important they are and how they can be gamed. There's some back and forth about whether anyone should regulate them at all, that we'll come to. But the prominence of a polymarket or a calci, it's only going up. And I'm wondering if you see the relationship between the existence of the prediction markets and the behavior of the principles in business, in politics, in finance, in a way that suggests, actually, this is going to go very badly. I'll give you, you know, the Brian Armstrong example is funny, but people are betting on all kinds of things for these companies to do that aren't even necessarily in the company's best interests, but the incentive to behave that way is only increasing.

22:29Liz Lopatto:Yeah. And so I can give you a couple of ways that this can go wrong, but I think this will be your favorite, which is that the 90s dream of assassination markets is alive and well, right? You can potentially win a bet about whether Tim Cook is still going to be the CEO of Apple by ensuring that he is not alive at the specific date at which that bet closes. Now, that's an extreme example, obviously. I don't think it's likely to happen, but it's certainly a possibility. There are also a couple of other things that are involved here. And one of them is that investigative reporters rely on insiders to tell us when something bad is happening in a company.

23:10Liz Lopatto:If you think about Theranos, John Kerry Rue's sources were people inside Theranos. They were Theranos workers who were saying, hey, like, what's going on here is fraud. What prediction markets do is they provide an incentive not for these things to be disclosed broadly to the public, just for the public good to try to prevent people from being harmed. But for you to trade on this information and make money on this information in a way that if you are talking to a reporter, you don't. Because by and large in the U.S., we don't pay for information. I have never in my entire career given anyone a dollar for anything.

23:45Liz Lopatto:You know, it creates this weird, perverse incentive when it comes to knowledge of wrongdoing, in part because now you can make money off of that instead of just like trying to live in a society.

23:57Nilay Patel:So when you see a Substack or a CNN or any of the other news organizations that are partnering with prediction markets loudly announce their partnership, are they just undercutting their own newsroom? Or are they getting a better, more direct sense that actually some insiders think something is going to happen?

24:14Liz Lopatto:I definitely think they're undercutting their own newsroom, right? Like they're not only sort of legitimizing the prediction markets by saying, hey, these are our partners, we're endorsing them. But they're also, you know, using the information in those prediction markets in order to make the news, which, you know, in the world of pseudo events can create like this weird Ouroboros where prediction markets say, let's say that Apple is going to buy Microsoft at thus and such, you know, date. and like there's a big weird trade on it. So that becomes news, which then folds back into the prediction market and changes the odds, which then again becomes news.

24:53Liz Lopatto:And like this sort of like round and about monetization of what is essentially a rumor mill, I think is a problem. And, you know, that's with something like CNN, where you have people who are actually paying attention to what counts and what matters. And like with Substacks, there are real reporters on Substack. And I don't want to pretend that there aren't. There definitely are people who are reliable there. But at the same time, there are a bunch of people who are just like, whoever, like just some people, you know, if they are making news, but nobody's checking to see if it's true, you wind up with situations like we've seen with the prediction markets a couple of times now, where somebody makes up a Jeff Bezos quote, it's not real.

25:32Liz Lopatto:And Bezos has to come out and deny it. So like, there's just like a way of polluting the information environment that I think this really contributes to.

25:39Nilay Patel:Why do you think Polymarket and CallShield are so motivated to say that they're news instead of just saying that they are prediction markets? There's something there, right, where they are absolutely drawn to insisting that they're the news, that the thing that they're giving you is information before it happens. What do you think that motivation is?

25:57Liz Lopatto:Oh, they want to distinguish themselves from being casinos, right? A significant amount of their trading volume is not actually on stuff that matters. It's on, you know, stuff around sports. We already have a sports betting industry, and it's already regulated in a very specific way on a state-by-state basis. Some of those state regulators are looking at the prediction markets and going, yo, you need to comply with our laws around sports betting, because this is sports betting. And so these guys are trying to distinguish themselves and say, oh, no, no, no, no. We're not sports betting. We're information.

26:32Liz Lopatto:We're like the news. We're part and parcel of the information environment. And this is actually a pretty big deal. There's been a lot of motion around it. For instance, you have FanDuel and DraftKings both pulled out of the American Gaming Association because they want to open prediction markets. This is a really big deal with a lot of money involved and pretty high stakes. So you can see why there's some maneuvering going on.

26:56Nilay Patel:I want to take a moment here to point out that we are in fact seeing some enforcement around insider trading on prediction markets. Last week, CalChi made its first ever disclosure related to an insider trading investigation and fined the traders. One incident featured an editor for Mr. Beast, who was betting on markets related to the creator's upcoming YouTube videos. The other was California politician Kyle Lankford, who was found to have been trading on his own candidacy. The fines so far are in the low thousands of dollars, so it's small fry stuff for now. But Calci says it's opened hundreds of such investigations in the past year, signaling that it takes this problem seriously enough to begin a wider platform crackdown.

27:32Nilay Patel:You'll notice, though, that it's Calci taking these steps internally and even issuing the fines, not any law enforcement authority. And so far, the law enforcement activity we've seen has been pretty toothless and reactive. For example, after this latest Calci press release, the Federal Commodity Futures Trading Commission issued its own press release, saying that insider trading like this might be illegal, but didn't confirm any enforcement action of its own. That brings us back to this central tension with prediction markets, whether insider trading is in fact the very feature that makes it all work.

28:02Nilay Patel:So now I want to bring in Vlad Tenev, the CEO of Robinhood. When Vlad was on the show last year, he went to bat for prediction markets in a number of ways on both the gambling and news fronts. As Vlad put it to me, the main goal of Robinhood is to, quote, acquire full wallet share of our customers across multiple generations. It's quite a goal. So I brought some clips of my conversation with Vlad to get Liz's reactions. Last year, we had Robinhood CEO Vlad Tenev on the show. Robinhood obviously does investing, but they are partnered with CalShe, and they want to bring prediction markets into everything.

28:34Nilay Patel:Vlad is very high on prediction markets being news. He said some things to me during that interview that I just want to play for you and get your reaction to. Because I've been thinking about a few of these quotes, particularly about insider trading. And again, I'm absolutely puzzled whether this industry thinks insider trading is good or bad. Here's this quote from Vlad. Check this out. How do you manage the prediction markets against that incentive? Because I see that as totally distorting and in most cases negative. I think that's a great question. And I think that's one of the areas where the traditional financial system already has lots and lots of infrastructure because we've faced this problem for decades.

29:14Nilay Patel:You have insider trading rules and regulations. And it's very analogous to a company insider using proprietary information for their own benefit to make money in financial markets. like that very much exists. So I listen to that. I say, OK, Vlad wants to take insider trading rules from traditional markets in which Robin Hood participates and bring them to the prediction markets that Robin Hood is expanding to. Is that what you're seeing? No.

29:46Liz Lopatto:I mean, like, first of all, let's remember that a lot of there is insider trading going on that nobody's doing anything about already in the existing financial markets, right? Like arguably our enforcement mechanisms are not strong enough. And he's saying we don't need any extra rules. These rules are good enough. That is what he's saying. Like, don't regulate us. Please.

30:07Nilay Patel:Let me play you the next one. Because again, and I'm just saying this for all the people listening. I'm finding it very hard to tell whether this industry has a shared understanding of whether insider information is good or bad. So here's the next quote from Vlad on Decoder last year. If you want to outlaw insider information, you have to prevent people who have that information from trading on it. So how does that get into the prediction market? Yeah. I mean, basically individuals who have proprietary information shouldn't participate in the prediction markets. And, you know, all of the DCMs basically have rules against this.

30:45Nilay Patel:And because we know who's making the trades, right? I mean, everyone has to be KYC'd at DCM, FCM, Regulated Prediction Markets. We have the capabilities of identifying abuse. And of course, all of these rules can evolve over time. So if there's new vectors for abuse as the markets expand, there's mechanisms for those to be incorporated and to become new rulemaking. I would say in the months since Vlad and I chatted, there have been new vectors for abuse as these markets have expanded, right? are we going to kidnap Nicolas Maduro as a new vector for abuse of a prediction market? Do you see any heat around, well, we should stop that?

31:31Nilay Patel:Because this is the industry classically saying we can regulate ourselves. But I don't see that push from inside the industry. Maybe you do.

31:39Liz Lopatto:Not only do I not see that push from inside the industry, if we rewind, we have people inside the industry saying stuff like insider trading is cool. And that's how we get information out. And that's like the bonus of these markets is that people have an incentive to share information broadly via insider trading. I'm not making this up. There is literally an academic paper on this. So I find this very difficult to believe because insofar as prediction markets have any value whatsoever, that value is tied specifically to insider information.

32:17Nilay Patel:So this is what I mean when I say I'm finding it hard to understand if the industry thinks this is good or bad. Because here's Vlad saying insiders shouldn't trade, and there are rules in the books, and the rules can evolve if there's new abuses, and those rules should be analogous to the rules against insider trading in the public markets, which maybe we're not enforcing enough, but everybody understands those rules. Then there's what you're saying, which is the value of the markets is the insider information. The insiders will communicate what they know by placing bets or buying contracts against information that's not yet public.

32:50Nilay Patel:Here's Vlad just talking about what he thinks news is. And I'm going to ask you to try to square these ideas between you shouldn't have insider trading and here's what Vlad thinks the news is. It's an evolution of what the newspaper served in the past. You have the front page, which is events that people want information of that are trending right now. Then you have the business section, arts and leisure style. And of course, you have sports. And the newspaper obviously had value. I mean, people were paying for it after the fact, right? Prediction markets actually give you that news faster, in some cases, before it even happens.

33:31Nilay Patel:So I think certainly it has enormous economic value. So, I mean, this is your framework, right? This is the most decoder thing of all time. You provided a framework for news and pseudo events. You said the news is history. Here's Vlad saying prediction markets give you the news faster, in some cases, before it even happens. Are these frameworks compatible without conceding that insider information is what makes the prediction market viable? No.

33:59Liz Lopatto:That's the whole ballgame right there. He's admitting essentially that the reason prediction markets matter is because of the insider information, because it's the news before it happens. You can't get there in any credible way without having insider information. Otherwise, you're just betting right. You can bet right on a coin toss, but that's not really information. So the idea that it is somehow valuable, even more valuable than the news, is predicated entirely on insider trading.

34:33Nilay Patel:We have to take another quick break. We'll be back in just a minute.

35:09Nilay Patel:We'll be right back.

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37:41Nilay Patel:So Liz and I have covered the news angle here and the insider trading component. But the last piece of this puzzle is the most important. Who is going to do anything at all about any of this? As you can imagine, politicians are starting to speak up. And it's not a clean break along partisan lines. Sure, the Trump administration loves Polymarket and Kalshi for a number of reasons. Donald Trump Jr. is an advisor to both companies. And Trump and his inner circle repeatedly pointed to production markets as the real indicator that he was going to win the 2024 election. But as we've seen since the start of the year, some Republicans are starting to break ranks, even as the CFTC says it will sue any state that tries to regulate prediction markets.

38:21Nilay Patel:The governors of New Jersey, Utah, and Nevada all seem prepared to go to court because prediction markets directly undermine the gambling taxes they collect from regulated sportsbooks. There's a host of other critics as well, all armed with different regulatory levels that might stop these prediction markets in their tracks. This is all going to get very messy this year, so I really wanted to dig in with Liz and where she sees this going and what we can learn from what happened with crypto. So this brings me to the regulatory piece. And you actually started this conversation by saying they don't want to be casinos.

38:51Nilay Patel:And the mechanism by which a prediction market operates is not the same as gambling. And I said they hate it when we call it gambling. And it's true that the mechanism is different, right? Instead of buying odds against the house, you're buying contracts that other people can also buy the other side of. And you can actually sell out of your bet early. The share price of your contract goes up and down and that's actually what makes the prediction market work is that it's a two-sided market. So if no one is buying what you're selling, there isn't any gambling to be done. That's the entire argument for why this isn't gambling, why the gaming commissions in various states should not regulate these platforms, for why it's not creating an assassination market because you need to have somebody credibly buying the other side of your bet.

39:36Nilay Patel:Give these companies the benefit of the doubt. Is that meaningfully different?

39:40Liz Lopatto:I don't think so. I mean, like, let's say, Nilay, you and I decide that we're going to make a bet on, what do you want to bet on? Is the Green Bay Packers winning sometime in the near future?

39:53Nilay Patel:Sure. It's rough. It's rough for me right now that you went there, but it's fine. It's fine.

39:56Liz Lopatto:Yeah. Let me have fun. So we make this bet, right? And then like, I decide, actually, I don't love my side of the bet. And so I sell it to, I don't know, Dieter. And Dieter is like, oh, I don't love this bet either. So I'm going to buy your portion of the thing for less than you paid. I just want to get rid of it. So I'm like, fine. There's still a bet happening. There's still functionally at the bottom an actual bet. The thing that I have just described is kind of convoluted, but it is still, the contract is still a bet. And like, if you think about futures contracts, which is the analogous thing that they want this to sort of be like, the origination of that has a commodity underneath.

40:37Liz Lopatto:And the commodity for a long time was grain. That's, I think, originally what was going on on the Chicago exchange. And then you had like pork bellies and any of a variety of other agricultural goods. The idea was that at the point that the futures contract expired, you would deliver the goods. There's been a bunch of weirdness around people betting on futures contracts in this way. Every once in a while, oil goes negative because some of the people who are goofing around and betting realize they actually can't take delivery of the oil that's about to come due. And so they just need to get rid of their contracts.

41:10Liz Lopatto:But that fundamentally is what a futures contract is. There's an asset underneath. And that sort of got abstracted into financial products where the thing underneath is a stock, where you buy or sell a stock at a certain price on a certain date. And so I guess what they're trying to say is this is a second level of abstraction. There's a similar financial product, except the financial product underneath has to be a bet. That's just what the contract is. That's what you're saying. I recognize why they want to be distinct from gambling, but I can't say that I think it is.

41:43Nilay Patel:I have to ask you this because you also covered crypto for us. It feels like a straight shot from the crypto economy to gambling with real money in this way. And it's a lot of the same players. Do you think that there's as much of a connection or is that just vibes?

41:59Liz Lopatto:It's a total straight shot, not least because some of these players, some of these markets are trading in crypto. So like when we talk about the Venezuela bet, like that person walked away with crypto. Like that wasn't a KYC transaction. This person has crypto that they are presumably going to launder before they cash out. So to the degree that this is something you can follow, well, maybe that's true on some of these platforms, sure. But a bunch of them are built on crypto. That connection just is direct. So yeah, I mean, the other thing that I'll say about it is that we also saw that sort of gambling spirit behind the sort of GameStop phenomenon during the pandemic, where the actual underlying value of the company was irrelevant to what was going on in the market.

42:52Liz Lopatto:I feel good about the stock was essentially what you were saying when you bought the stock. And like, I like the stock famously is what the rallying cry was. So there is this sense in which reality doesn't matter. The representation of reality matters. And for, you know, some of us who've read some French theory, this is a very uncomfortable place to be. But that's kind of where we are. And like, this sort of sense of financial nihilism, especially among younger people, is a really important part of this. Like both the increase in inflation and the decrease in opportunities has sort of resulted in people being like, all right, well, if I ever want to be able to retire, I have to gamble and get really rich because I can't do it on my current salary.

43:45Liz Lopatto:Like I'm just barely keeping my head above water. I can't, you know, sock away enough that I know that I'm going to be able to like, you know, live out my golden years comfortably. So if I want to ever have real money, I have to gamble somewhere.

44:01Nilay Patel:I see that all over. I see that in our audience. I certainly see that in crypto. There was a part of me that thought the meme stock phenomenon was just a bunch of bored people at home during the pandemic. And now I'm increasingly convinced it's the entire economy in a way that is maybe not good. That said, it's still gambling. There are some states that collect a lot of revenue from legal gambling. There are some states that want these prediction markets to participate in that system so they can collect even more revenue. There are some states, Republican states like Utah, that think gambling is immoral.

44:32Nilay Patel:And there's already a fight between Utah Governor Spencer Cox and the only commissioner on the Commodity Futures Trading Commission, Mike Selig. Mike Selig says he will prevent all states from regulating prediction markets. Governor Spencer Cox says try me and find out. We can see it in New Jersey and Nevada that they would like prediction markets to regulate it the same way as their existing gaming industries. What is the likelihood that this bipartisan coalition of states and gambling commissions and anti-gambling advocates is going to find a way to meaningfully regulate the prediction markets?

45:10Liz Lopatto:Great question. I don't know the answer to that, by the way. Because, you know, again, I can tell you what happened. And one of the things that I can tell you has happened is that these prediction markets have hired Donald Trump Jr. as an advisor. And this administration is astonishingly corrupt. We've seen people have their SEC actions dropped essentially after donating to Donald Trump. So, you know, the fact that Trump Jr. is involved tells me that the feds are going to fight tooth and nail to avoid letting the states, you know, regulate this. So we're going to end up in court. And how that turns out is anybody's guess.

45:50Liz Lopatto:And whether or not we decide that we're going to actually enforce the court's ruling is still anybody's guess. So, you know, to be continued, I suppose. But I think for now, I expect this to continue rolling out and continue trying to embed itself in the national consciousness in such a way that if there ever is any action against the prediction markets, you know, a lot of people are going to feel upset about it and that that sort of public sentiment potentially protects them.

46:24Nilay Patel:I think there's something absolutely wild about famous sports stars becoming spokespersons for prediction markets. There is something very weird about our literal major leagues trying to keep gambling away for so long and now embracing it so wholeheartedly that the players are telling you to gamble. And I actually wonder if that's going to cause this all to crack, right? At some point, the thing that you create is the sense that everything is rigged and all this insider information means that you will never get an edge and that you're just watching a giant conspiracy theory unfold. And eventually the bottom falls out of that.

47:01Nilay Patel:I think that is probably catastrophic. I think that is an outcome everyone should try to avoid. But it does seem like the outcome we are headed towards.

47:07Liz Lopatto:I think it's also the reason that we initially had banned sports betting, is it not? Like, there very famously were a number of players who were disgraced because they had been on their own games or thrown their own games. And it's also something that's, like, in the history of boxing as well, you know. This is something that we have dealt with before, decided that we did not want and got rid of. And now everybody who, like, experienced it and was like, this is bad, is dead. And so we're going to do it again and think it's going to turn out different, I suppose.

47:40Nilay Patel:Well, no, we're doing it again this time with computers. That's what's different. Great. The last time there weren't computers. This time there's KYC laws in computers. Besides just the catastrophic loss of trust and everything, is there anything else that you think would flip the conversation? Is it just young men who, you know, by all sort of public opinion polling know that gambling is bad for them stopping? Is it some other sort of, I don't know, catastrophe in the culture that makes more states more amenable to regulating these industries?

48:16Liz Lopatto:I don't know what that would be. It could potentially be something in sports where we discover an entire team is fixing outcomes or that an entire league is fixing outcomes. It could be something else where, you know, we discover that some important politician has fixed an outcome. and there is a real consequence, a real event that occurs because of this fixed outcome. But yeah, I think, you know, young men going bankrupt isn't going to move the needle and it hasn't moved the needle so far because it's been happening pretty regularly with crypto for a decade now and no one cares. So I really think that we are headed someplace very, very bad and there doesn't seem to be a lot of urgency in preventing it.

49:01Liz Lopatto:And then on top of that, That, you know, a lot of our trust in our public institutions has really been shaken and is being corroded by the Trump administration, I think deliberately to benefit Donald Trump, which, you know, makes it even harder to try to stop this because who would you trust to stop it?

49:20Nilay Patel:I don't know what happens next. Liz, I suspect we're going to have you on several times this year to figure out what's going on with these markets. You're covering them for us in great detail now. Thank you so much for being on Decoder. My pleasure. I'd like to thank Liz for taking the time to join Decoder, and thank you for listening. I hope you enjoyed it. If you'd like to let us know what you thought about this episode, or really anything else at all, drop us a line. You can email us at decoderattheverge.com. We really do read all the emails. Or you can hit me up directly on Threads or Blue Sky.

49:46Nilay Patel:We're also on YouTube. You can watch full episodes at DecoderPod. That's the same handle you can find us at on TikTok and Instagram. Both platforms are a lot of fun. If you like Decoder, please share it with your friends and subscribe wherever you get podcasts. Decoder is a production of The Verge and part of the Box Media Podcast Network. The show is produced by Kate Cox and Nick Stat and edited by Ursa Wright. Our editorial director is Kevin McShane. The Decoder Music is by Breakmaster Cylinder. We'll see you next time.

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