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Intrade shutdown disrupts betting market on elections, air strikes, and celebrity arrests

Intrade shutdown disrupts betting market on elections, air strikes, and celebrity arrests

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The site had become a cultural force, but federal regulators deemed it illegal

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businessman with crystal ball shutterstock
businessman with crystal ball shutterstock

Intrade, the exchange that takes bets on things like who will win the US presidential election and what films will win an Academy Award, has always been a fun scene. In recent years, it became much more, as the media realized that the odds on Intrade could often predict the future.

But on December 23, all bets are off for Americans. Intrade is cutting off its US customers after the Commodity Futures Trading Commission (CFTC) sued the Ireland-based company for violating US law. Intrade was taking bets on so-called "commodity options" — things like the price of gold and the cost of oil — without listing the contracts on a CFTC-regulated exchange. An affiliated company, TEN, was also charged.

In the past, the CFTC has said that bets on things like political events "involve gaming" and are contrary to the public interest.

Regulators say political bets are contrary to the public interest

"We will intervene in the 'prediction' markets, wherever they may be based, when their US activities violate the Commodity Exchange Act or the CFTC's regulations," David Meister, the director of the CFTC's Division of Enforcement, said in a statement.

The federal government recently cracked down on poker sites for violating online gambling laws, after letting them operate unchecked for five years. The CFTC’s actions against predictions markets seemed similarly sudden, although the law has been chipping away at Intrade for a while. The Unlawful Internet Gambling Enforcement Act in 2006 made it tougher for Intrade to take payments from US customers, and financial reforms enacted in 2010 nixed bets on box office receipts. The latter also put the kibosh on Cantor Exchange, a Hollywood-centric predictions market that was just getting off the ground.

Predictions markets have been growing in popularity and cultural significance since the mid-90s. The University of Iowa launched a predictions exchange in 1988 as an economic experiment. It earned the CFTC’s blessing in 1992 because of its academic nature and the fact that bets are capped at $500. The Iowa Electronic Market is now used by more than 100 universities and takes real-money bets on elections, monetary policy, box office receipts, and corporate earnings. Googlers set up an internal predictions market to bet on things like how many users Gmail would have by the end of the year, where Google would open new offices, and what products competitors were launching.

It’s the use of real money that gets sites like Intrade and TEN in trouble. But it’s precisely the money that makes them so interesting. People are sloppy and biased when betting with meaningless internet gold or Monopoly money. Ask them to wager a few bucks, and suddenly they’re considering all sides and researching the odds.

Real money betting makes predictions markets interesting

There’s been a heated debate over the CFTC’s handling of Intrade. The agency says it’s dangerous to allow trading without regulation, but did not cite an example of any harm being done. Critics argued that the lawsuit was an overreaction and that the demise of the predictions market is a loss for academia.

In 2008, a paper written by 19 economists argued that the range of useful applications for predictions markets "is virtually limitless." "The ability of groups of people to make predictions is a potent research tool that should be freed of unnecessary government restrictions," they wrote presciently.

Intrade did not respond to a request for an interview, but told users that reports of its own death were premature. "This in no way signals the end of Intrade in the US. In the near future we’ll announce plans for a new exchange model that will allow legal participation from all jurisdictions – including the US," the company announced in an email and on its forum.

Intraders fear, however, that a relaunched Intrade will have to use fake money in order to operate legally. If that happens, or Intrade disappears altogether, it will be a shame. Americans account for 40 percent of Intrade’s user base, the CFTC estimates. Since just 55,848 users logged in during 2012, such a massive loss of traders means Intrade’s accuracy will seriously suffer. Ironically, the US election contracts that are so popular will now only be traded by foreigners. "I like InTrade," said the usually-cynical Josh Brown, a New York financial advisor and blogger behind The Reformed Broker. "[It] was a cool mood ring for those of us who are interested in what the consensus was so that we could formulate our own ideas either based on it or running contra to prevailing opinion."

Fox Business's John Stossel talking about Intrade and predictions markets. The Defense Department wanted to set up a predictions market for world events in 2011, but it was canceled because politicians thought it was in poor taste to bet on a "terrorism futures market."

Intrade's reputation got a boost in 2008, when the collective wisdom of Intraders accurately predicted the outcomes in all but two states and missed the total electoral count by just one vote. The site is by no means a perfect predictor of outcomes, however, nor is it the best. It got beat by Nate Silver’s poll aggregation method in 2012, and its traders have certainly flubbed events outright in the past. The insurance mandate in Obamacare, for example, had a 75 percent chance on Intrade of being ruled unconstitutional. Of course, the opposite came to pass.

There are a few alternatives, such as New Zealand-based iPredict, which has low volumes and mixed reviews. Nadex is a CFTC-regulated predictions market but doesn’t offer political contracts, or really any "fun" contracts at all — it sticks to precious metals, stock prices, and economic indicators. Hardcore Intrade addicts can also turn to the tiny prediction market Bets of Bitcoin, where some believe converting your dollars to the internet currency Bitcoin circumvents laws around commodity options because the site isn't using a government-recognized currency.

Intrade user "ammoniad" is a Boston small business owner who firmly believes that Intrading is legal. However, he requested his real name be withheld in light of the CFTC’s legal actions against Intrade.

"A real value for society is created."

He likes Intrade because politicos, pundits, and businesspeople are often incentivized to twist the truth. But on Intrade, only accuracy is rewarded. His first big play on Intrade came when he accurately predicted that Sarah Palin would not run for president. "There were a lot of right-wingers who were so blinded by their adoration of Palin that they were unable (or unwilling) to recognize very clear signs that Palin was simply teasing them for personal gain and never had any intention of running for the nomination," he recalled.

In 2012, the predictions around the presidential race were similarly affected by wishful thinking. The race was depicted as very close by the mainstream media despite the fact that Intrade (and New York Times poll analyst Nate Silver) had the odds overwhelmingly in the President’s favor. In the end, Intrade only got one state wrong: Florida.

"A real value for society is created by a market where members have a real, financial incentive to predict what they actually think will happen," ammoniad said. "The most recent election is all the proof you could ever need that such a market produces far more accurate predictions than are produced by the traditional media."

The general debate will be worse off without the wisdom of the crowd, as filtered through the normalizing effects of real money wagering. Intrade’s user base has a wide range, including opportunistic Wall Street traders, dogmatic Tea Partiers, and precocious college students. They proved to be worth listening to, at least as much as the experts.

Correction: An earlier version of this story mistakenly identified TEN as a company independent of Intrade. The companies are affiliated and operated the predictions market jointly.