Manipulation, Insider Information, and Regulation in Leveraged Event-Linked Markets

Paper: arXiv 2605.10486

Authors: Maksym Nechepurenko

Abstract

The introduction of leverage on prediction-market event contracts raises three structurally distinct questions that have not been addressed jointly: how leverage changes manipulation incentives, how it interacts with informed-trading rents, and how regulatory frameworks should respond. This paper develops a theoretical framework for the first two and a synthesis of the existing regulatory landscape for the third. The principal analytical move is a two-axis manipulation taxonomy distinguishing market-price manipulation from real-world outcome manipulation, where the manipulator affects the underlying event itself. Continuous-underlying derivative markets generally do not make outcome manipulation a venue-level payoff channel; event-linked markets do. Within this taxonomy, leverage plays asymmetric roles: it scales market-price manipulation linearly but shifts the cost-benefit threshold for outcome manipulation, and it scales informed-trading rents in three ways (direct multiplication, Sharpe-ratio preservation, detection-cost amortization). Section 7 connects Paper 1’s pre-emption and halt-protocol findings (CC-007b, CC-008) to three manipulation channels: pre-emption introduced by the dynamic-margin engine, halt-arbitrage introduced by the resolution-zone halt protocol, and strategic bad-debt-shifting that no engine in Paper 1’s framework family addresses. The framework’s manipulation-resistance contribution is a re-allocation of attack surface, not a net reduction. The regulatory synthesis covers principal jurisdictions (US, EU, UK, Singapore, offshore) and identifies three regulatory-arbitrage pathways. The paper concludes with 14 recommendations for venue operators, regulatory bodies, and the research community, separated into framework-independent and framework-conditional categories.

Complexity vs Empirical Score

• Math Complexity: 6.5/10
• Empirical Rigor: 5.5/10
• Quadrant: Holy Grail — high math complexity, high empirical rigor

Why this score: The paper constructs a formal partial-equilibrium cost-benefit framework and a theoretical taxonomy for manipulation, while simultaneously grounding its findings in substantial empirical data from the ForesightFlow research program and existing prediction market transaction histories.

Research Flowchart

  flowchart TD
    A[<b>Research Goal:</b> Impact of leverage on event-linked market manipulation & regulation] --> B[<b>Inputs:</b> Theoretical framework, existing regulatory landscape & event-market protocols]
    B --> C[<b>Computational/Analytic Process:</b> Two-axis manipulation taxonomy & leverage-scaling model]
    C --> D[<b>Processes:</b> Connect findings to pre-emption, halts, and bad-debt-shifting]
    D --> E[<b>Key Findings:</b> Asymmetric impact of leverage on manipulation & regulatory arbitrage pathways]
    E --> F[<b>Outcomes:</b> 14 regulatory recommendations & re-allocation of attack surface framework]

Cited References (16)

1. Stock-Price Manipulation (1992)
2. Continuous Auctions and Insider Trading (1985)
3. Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders (1985)
4. Stock Market Manipulations (2006)
5. Interpreting the Predictions of Prediction Markets (2006)
6. Prediction Markets (2004)
7. Resolution-Aware Perpetual Futures on Binary Prediction Markets: Failure Modes and Mechanical Stress Tests Using Polymarket Data (2026)
8. A Taxonomy of Event-Linked Perpetual Futures: Design Axes, Failure Modes, and Empirical Evaluability (2026)

0 of 16 cited works are in the corpus; resolved via arXiv source bundles, Semantic Scholar and OpenAlex. Corpus-wide: 2518 linked papers.