I'm guessing the point was that the data was already high quality and reliable until these legalized prediction markets introduced perverse incentives to manipulate it.

No the negative externality here is that we've derived a value directly to this data, thereby negatively incentivizing this poor behavior. To further elucidate, it effectively introduces a cat-and-mouse game for the people who actually care about the data itself, they now have to worry about nonsensical third party behavior.

How can you know the data is higher quality?

In my city, the airport has wildly different weather than the city center, and the data I get has no relation to what I experience, for example.

Only if you refuse to acknowledge the deleterious effects on society from ruining any notion of trust.

Being held hostage by bad actors until you fortify your defenses seems to be a very unnecessary technical solution to an easily predicted social one.

Normalizing this only means the subterfuge becomes more subtle, not that you remove it entirely. But you preserve the incentives by not changing this system. So you're spending a lot of resources wastefully when you could just... not.