How does that even work?

An insider doesn’t make their bets known until they are certain they can take advantage of it. The whole point of the move is to predate on the rubes.

In all the cases of insider trading I have been aware of, I have never once heard this argument, until that interview with a prediction market CEO.

The whole point of insider trading is to ensure an unfair trade. The moment you enshrine unfairness as a core tenet of your market place, it loses price discovery capability, ensuring that the surplus is captured by manipulation not performance.