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Or, and I beg you to consider this radical position: we arrest people who break the law (insider trading is illegal) and those who knowingly help them to do so (the operators of the prediction markets).

How quickly we accept the death of even the ideal of rule of law in favor of embracing a return to an explicit rule by might, fuck-you-got-mine mentality.

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It doesn't break the law.
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From Wikipedia[0] because I can't be bothered to read more than a few paragraphs:

> In 1909, well before the Securities Exchange Act was passed, the United States Supreme Court ruled that a corporate director who bought that company's stock when he knew the stock's price was about to increase committed fraud by buying but not disclosing his inside information.

Based on anti-fraud common law alone the court decided it was illegal for an insider to trade stocks with non-public information. An explicit law would be nice, but a reasonable interpretation of basic law would see most of our ruling class behind bars. This is only highly-contested and technical because we've let our standards slip so far.

0: https://en.wikipedia.org/wiki/Insider_trading

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If it doesn’t then it should.
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We also care about the world outside the prediction markets. If decision-makers have an incentive to "throw the match" by making surprising decisions, that will impair the decision-making, which will affect the rest of us. Likewise, sufficiently-wealthy actors will be able to manipulate the behaviour of officials by betting against the behaviour they want to see, much like an assassination market.
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> manipulate the behaviour of officials by betting against

Right, it becomes regular bribery with middleman and a funny hat.

"I didn't pay the judge to dismiss the case against me, I just hedged by betting I'd be convicted and he just happened to be betting I'd go free, and now my money is coincidentally in his pocket.

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