The Death of Intrade

Can prediction markets survive government assault?

(Page 2 of 3)

But until recently, Hanson notes, "information aggregation has been a side effect of markets. The main effect has been risk hedging or speculation for entertainment." By democratizing the process beyond institutional hedgers and those actively buying and selling the underlying product, Intrade attached prices to widely held political-market beliefs, generating vast troves of interesting and useful information from crowds.

Among the site's most notable predictions were correctly predicting the capture of Saddam Hussein in 2003 and the elevation of Joseph Ratzinger to the papacy in 2005. The future Pope Benedict's share price spiked in the final day before the white smoke appeared, despite the fact that the decision took place inside the notoriously secretive conclave of cardinals.

Intrade's record is far from perfect, of course. Traders at the site famously miscalled the Supreme Court's decision about ObamaCare in June 2012, showing a 75 percent likelihood that the law would be declared unconstitutional. And in the 2012 election, predictions by 538.com number-cruncher Nate Silver were generally considered to be more accurate and informative than Intrade's results, a fact touted widely by prediction-market skeptics.

Hollywood Ending

Intrade has always existed on somewhat shaky legal ground. Since John Delaney founded the original incarnation of the firm, TradeSports, in 1999, the company's eclectic prediction markets have operated just inside various interpretations of American commodities and gambling laws. New rules frequently encroached on the company's existing turf. In 2006, for instance, the Unlawful Internet Gambling Enforcement Act added additional hoops for U.S. customers to jump through when making payments to the site. (For more about that law, read Jacob Sullum's "How Poker Became a Crime," page 62.)

Intrade itself hosted a series of markets where traders could bet on the continued existence of the site, offering possible shutdown dates of June 2009, December 2009, June 2010, and December 2010. As the founder explained on his blog about the new markets: "Intrade has always strived to list innovative markets that give maximum transparency in real-time on uncertain future events."

What's more, the firm was not a model of good corporate governance. In May 2011, Delaney was found dead at age 42, having fallen just 50 yards shy of the summit on Mt. Everest. He left behind a wife, two sons, and a daughter born prematurely while he was on the mountain. The March shutdown two years later was hastened not only by the CFTC suit, but a simultaneous inquiry by the Irish government into nearly $1.5 million in suspect payments to Delaney's personal accounts two years earlier from a pool of money that should have been held in trust for traders. No malfeasance has been demonstrated, but the money-transfers and Himalayan adventuring raised many eyebrows.

Even as regulators and legislators chipped away at the business, Intrade also began to face competition. The North American Derivatives Exchange, or Nadex, launched in 2004 as a CFTC-regulated market allowing investors to hedge against various economic events in binary trades similar to Intrade's. Nadex mostly confines itself to much drier subject matter, resulting in lower volume and fewer splashy headlines, but also a more legally secure position.

In fact, Nedex explicitly pitched itself to regulators and the general public as a safer alternative to offshore companies like Intrade. "If the information is going to be reported to the public on such a wide basis, shouldn't it be coming from a regulated exchange rather than an unregulated overseas trading platform?" Timothy McDermott, the firm's general counsel, suggested to The New York Times in March 2012.

Nadex dropped its bid to open political markets that year after the CFTC said in April that contracts on political elections "involve gaming and are contrary to the public interest." Nadex backed off before things got too hot, which may have given regulators the incentive and time to turn their attention to the booming Intrade markets.

Intrade wasn't the first futures market to go down in a blaze of sudden attention from concerned government officials. Consider the deaths of two enterprises focused on Hollywood. In the early '00s the investment firm Cantor-Fitzgerald purchased an online game called the Hollywood Stock Exchange. At the time, players in the game used fake money to speculate on the box office of major motion pictures. The boys at Cantor thought it might be worth injecting some real money into this fantasy film league. Four months after the purchase, however, 658 Cantor employees were killed in the World Trade Center and the project was put on hold.

The idea reemerged in 2008, but by that time it had company. A competitor, Veriana Networks, planned to offer similar markets with a more conservative approach. While Cantor hoped to make the fictional game's base of 200,000 players into real-life futures traders, Veriana targeted only institutional investors. Both ventures were well along in development-Cantor had spent four years and several million dollars on the project and Veriana had already cleared the majority of its regulatory hurdles, including the required period of public comment-when the Hollywood studio system suddenly got wise.

In May 2010, Big Hollywood called in the big guns. California Sens. Barbara Boxer and Dianne Feinstein sent the CFTC a letter denouncing both operations. "We are writing to request that you delay approval of designated contract markets that intend to facilitate trading of 'movie futures contracts,' " the two Democratic senators declared. "The film industry has raised serious questions about whether these proposed markets are consistent with the public interest as defined by the Commodity Exchange Act. The Commodity Futures Trading Commission should fully consider and address these concerns before it acts."

A bipartisan team of Reps. Lamar Smith (R-Texas), Robert W. Goodlatte (R-Va.), and Henry A. Waxman (D-Calif.) chimed in, singing the same tune. The Motion Picture Association of America (MPAA) and other industry powerhouses denounced the markets as "legalized gambling" in press releases and letters to the CFTC, ironically citing the gossipy opacity of their industry as the primary reason futures markets should be banned.

The New York Times obligingly credited MPAA President Bob Pisano's concerns about "the risk of market manipulation in the rumor-fueled film world, conflicts of interest among studio employees and myriad contractors who might bet with or against their own films, the possibility that box-office performance would be hurt by short-sellers, difficulty in getting or holding screens for films if trading activity indicated weakness and the need for costly internal monitoring to block insider trades." In other words, markets could be bad news for the messy and inefficient status quo.

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  • Rasilio||

    Hah. I actually worked on the Cantor Exchange.

    After they were shutdown for the Hollywood exchange they moved into setting up binary exchanges on currency futures through an app that runs on IOS/Android devices and as of this moment is still available for download.

    That said the app was apparently not as popular among institutional investors as they had hoped and Cantor finally pulled the plug and laid the entire dev team off a couple of weeks ago. Fortunately for me I kinda saw the writing on the wall a couple of months ago and left the company before then.

  • Will Nonya||

    Who could have predicted that...

  • Rasilio||

    Well it turns out that I did :-)

    That said part of the reason why the app did not do particularly well is because they had to release it before it was really ready. Basically they had a hard deadline to execute at least 1 trade by February of this year or they would loose their CFTC license. As a result they never had time to fix the performance issues or pare down the data volume (the first day I ran it on my own phone I chewed through 40MB of bandwidth in about 3 hours)

  • Ketogenic Paleo||

    I think you mean they'd lose their CFTC license.

  • cw||

    As long as some bureaucrat gets his ban boner on, the world is safe place.

  • ||

    OT: Calm solar cycle prompts questions about impact on Earth

    Some researchers speculate this could be the start of a prolonged period of weak solar activity.

    The last time that happened, during the so-called "Maunder Minimum" between 1650 and 1715, almost no sunspots were observed. During the same period, temperatures dropped sharply on Earth, sparking what is called the "Little Ice Age" in Europe and North America.

    As the sunspot numbers continue to stay low, it's possible the Earth's climate is being affected again.

    But thanks to global warming, we're unlikely to see another ice age. "Things have not started to cooling, they just have not risen as quickly," Biesecker said.

  • Christophe||

    The delicious irony in CO2 saving the planet is too much.
    I'll be eagerly awaiting confirmation on this.

  • Robert||

    Why couldn't they have registered with the CFTC?

  • bassjoe||

    EXPENSIVE as hell with all sorts of requirements that Irish-owned InTrade probably doesn't want to have to deal with.

  • Rasilio||

    It's expensive, takes a LONG time, and even after you have your license all it takes is to literally have the wrong wording in your terms of service or offer up a politically unliked binary option and they shut you down anyway.

  • bassjoe||

    The death of InTrade (at least in America) is a damn shame. The Internet allowed the creation of futures markets to predict ANYTHING, instead of the limited commodities that are traded on floors in Chicago. The price of entry allowed millions of people to back up their opinions on matters of public importance with a relatively small amount of cash.

    What did we learn from InTrade's short life? That a market where huge numbers of people can freely exchange is actually pretty good at predicting things. If InTrade started expanding into, say, oil price predictions it could have been a serious challenge to the power of the trading floors. God forbid.

  • arlanvoa47||

    just before I looked at the receipt 4 $9739, I didn't believe ...that...my father in law was like actualey receiving money part-time on their apple laptop.. there uncles cousin has done this 4 only nineteen months and a short time ago cleared the mortgage on their place and bought Toyota. visit..............

    ==============================================

    http://www.fb49.com

    ==============================================

  • Giulio Prisco||

    There is a prediction market in Bitcoin, much more difficult for the government to shut down. Bitcoin is becoming a very important tool in the liberty toolkit.
    http://www.predictious.com/

  • Koblog||

    Gambling should always be illegal.

    It's immoral, takes advantage of the foolish, encourages those least able to afford it to bet the rent and is little more than organized theft.

    That's why our benevolent, all-knowing, moral government should operate -- and profit from -- State Lotteries. It's for the children!

    ***********

    Off topic but applicable to this excellent article: why do web publishers insist on using a hyphen when they mean to use an em dash to offset parenthetical thoughts?

    Sample: "You'd better step up (and step on) prediction markets that threaten established industries-including the industry located on Capitol Hill-or else we'll do it for you."

    It's confusing if the reader initially reads the word pairs as hyphenated -- "industries-including" and "Hill-or" make no sense.

    I realize the em dash character -- depending on a Mac or PC character set and the web publishing software -- may not publish properly, leading to strange, unintended characters being displayed, and should be avoided.

    Why not simply adopt a modified age-old typewriter style to create an em dash -- two hyphens, but offset by spaces on either side so the publishing software won't auto-correct the two hyphens to a single one?

    Those of us who speak -- and write -- in footnotes will appreciate the stylistic help.

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