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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.
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,'â€Š" 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.