Free Minds & Free Markets

The Death of Intrade

Can prediction markets survive government assault?

If you've heard of Intrade, you probably know about the site's impressive record predicting the outcome of the last several U.S. presidential elections. Last November, traders at the online prediction market correctly called every state except Florida and Virginia. In 2008, Intrade missed Barack Obama's final Electoral College tally by just a single vote.

Trading volume in 2012 was high, with eager speculators making more than a million transactions involving 23.8 million shares. (Buying a share is essentially making a bet that a certain event will occur.) In addition to political prediction markets, Intrade offered contracts on everything from Oscar nominations to the price of gold to the birth dates of celebrity babies.

But just 20 days after Intrade's electoral triumph, the federal government launched proceedings that would eventually shut the site down. On November 26, the U.S. Commodity Futures Trading Commission (CFTC) filed suit in a Washington, D.C., district court against the Ireland-based firm, alleging that Intrade had violated a ban on unregulated options trading.

"It is against the law to solicit U.S. persons to buy and sell commodity options, even if they are called 'prediction' contracts, unless they are listed for trading and traded on a CFTC-registered exchange or unless legally exempt," David Meister, director of the commission's enforcement division, wrote in a statement heavy on both legalese and sneer quotes. The statement specifically mentioned Intrade markets pertaining to the price of gold and currencies-turf that traditional commodities markets usually occupy.

While the government cited no evidence of harm, it claimed that the rules Intrade broke "enable the CFTC to police market activity and protect market integrity." The CFTC said it would seek "civil monetary penalties, disgorgement of ill-gotten gains, and permanent injunctions against further violations of federal commodities law."

The following Monday, citing "legal and regulatory pressures," Intrade announced that U.S. traders had little more than a month to empty their accounts. "We understand this announcement may come as a surprise and a disappointment, and we apologize for the short notice and haste required to deal with this."

With the Americans out, Intrade quickly dwindled to a shadow of its former self. By March volume had fallen to a meager 50,000 trades for the year. On the 10th of that month, a somewhat cryptic message appeared on the site's main page announcing that all trading had been shut down after the discovery of "financial irregularities" that ran afoul of Irish law.

And that was that. The Intrade experiment-and much of the promise of public prediction markets-had been squashed by overzealous regulators.

Gambling for Information

"The history of financial regulation is that everything was illegal gambling to start with," says the George Mason University economist and entrepreneur Robin Hanson, one of the founders of the field of prediction markets. "Then exceptions were carved out for things that were no longer gambling. Insurance, stocks, commodities futures, options-if you look back, you'll see that all of these things were illegal. In a world where people don't see a point to it, they saw it as gambling and banned it."

Wagering and speculation have been around for a long time. A Vedic poem called The Gambler's Lament documents betting by Iron Age Indians, while records show that ancient Egyptian gambling fanatics frequently wound up working in stone quarries. But as anyone who has ever spun a dreidel on Hanukkah knows, religions have mixed views on the subject. The Greek word for justice, dike, has roots in the word for "to throw," as in dice. The Catholic Church OKs gambling in moderation as long as the games are not rigged. Officially sanctioned sports betting dates to late-18th-century Europe.

In more recent times, the technology to facilitate speculation has improved, making for faster, more accurate trading and record-keeping, and expanding the potential market of gamblers to anyone with an Internet connection. Intrade markets were little more than simple up-or-down binary contracts-a price of $0 meant the event would not occur before the date, $10 that it would-aggregated at a large scale.

If Intrade was still operating, for example, it's quite likely a market like this would be on offer: "Miley Cyrus will serve time in prison on or before January 1, 2014." Say that contract was trading at $4.99/share. Traders who think Hannah Montana's slutty alter ego is headed for the Big House should buy shares. Those who think she's already hit rock bottom and is going to turn her life around should sell.

As in all markets, more buyers drive prices up and more sellers drive them down. In the simplest reckoning, a share price of $6 was equivalent to a 60 percent probability that an event would occur. Traders could buy and sell at any time, with prices skyrocketing or collapsing based on breaking news. (Mitt's stock was suddenly a hot potato, for instance, after Ann Romney declared that her family would not be disclosing further financial data to "you people.") At the set deadline for the event, though, every market closed either at $0 or $10. On November 6, 2012, the price for "Barack Obama to be re-elected president" hovered just below $7, but the market closed on the 7th at $10.

Intrade provided something more beneficial than cheap thrills and occasional profits for participants: It generated information. As the economist F.A. Hayek explained in his seminal 1945 essay "The Use of Knowledge in Society," the prices produced by a decentralized marketplace can be a better source of information than whatever emanates from powerful central planners or even acknowledged experts. "Without an order being issued, without more than perhaps a handful of people knowing the cause," Hayek marveled, "tens of thousands of people whose identity could not be ascertained by months of investigation, are made to use the material or its products more sparingly; that is, they move in the right direction."

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 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.

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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 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..............



  • 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.

  • 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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