Go Ahead and Short Your 'InTrade Will Come Back' Contract

from the betting-the-house dept

Cross-posted from

While most of you are busily reading about the latest effort from U.S. News to calculate with the incalculable, applying its formula to tease out razor-thin distinctions between law schools, you’re missing the demise of the once lauded Internet prediction site, InTrade. What were the odds?

Over the weekend, the Irish-based website shuttered itself completely, noting in a statement to customers that there may be “financial irregularities.” Uh-oh.

All this comes at the worst possible time for InTrade customers, who were looking to cash in on that sweet, sweet Conclave action…

Customers in the U.S. already lost access to InTrade back in November, when the CFTC waved around a 2005 cease and desist. The CFTC’s beef with InTrade revolved around the website selling contracts that looked an awful lot like commodity futures. The CFTC does not like commodity futures traded from outside their regulatory framework. And even though InTrade specifically asked the CFTC to step in and regulate their trading, the CFTC opted to functionally shut them down (once the Presidential election contracts were all paid out, of course). The CFTC didn’t give a very clear explanation for this decision, but the CFTC apparently felt that allowing micro-level trading on commodity futures constituted a societal ill they could not accept — while institutional investors tossing around trillions seems perfectly harmless. Or the CFTC was just lazy. Never underestimate “just lazy.”

InTrade’s closure over the weekend was not related to trading commodity futures, but some vague suggestion of “financial irregularities.” Details remain sketchy, but the best guess out there alleges that InTrade failed to maintain duly segregated accounts.

What on earth is going on? My best guess is that the margin posted by traders was not held, as it should be, in segregated accounts separate from company funds. When bets are made on this market, both parties must post margin equal to their worst-case loss, so that neither is subject to counterparty risk. In effect, each party is taking a position against the exchange, but these positions are exactly offsetting so the exchange bears no risk. To ensure that all promised payments can be made, these funds must be held in the form of cash, insured deposits, or safe dollar-denominated securities such as Treasury bills. They cannot be invested in risky assets, and cannot be used for the payment of salaries or expenses.

The latter point about the “payment of salaries or expenses” is in line with the recent announcement that auditors had flagged payments to InTrade’s former CEO, the late John Delaney.

The loss of InTrade will spark glowing eulogies from multiple sectors, but losing the political prediction market will be the toughest loss. The political reporting class openly crowed about InTrade’s predictive power for years. The Washington Post already published its lament over the passing of InTrade as the loss of the last, best hope for pundit accountability:

It’s a shame, and this is why. We live in a world of punditry in which there are large amounts of, to put it nicely, horse manure. Those of us who write and talk about what will happen inevitably rely on vague predictions, full of qualifications. I’m guilty of it myself, and often find myself writing things like “this ought to be an OK year for the economy, if fiscal austerity isn’t too severe and there isn’t a return of the European crisis.”

On Intrade, by contrast, the traders who participate and collectively set market prices, are forced to choose—and put money where their mouths are. Will the United States enter a recession in 2013? Before it shut down, the prices for that contract on Intrade implied a 16.9 percent chance that the answer was “yes.” In a world in which people hold their pundits to a higher standard, people spouting off on the economy (or politics, or foreign affairs, or the selection of the pope) would be forced to make specific, testable predictions, and attach probabilities to those guesses.

I actually thought the best hope for pundit accountability would be a media willing to confront their own pundits with past flawed predictions, rather than sweeping the past under the rug every day, but what do I know?

But the legal fallout from the end of InTrade, for the U.S., will be the inevitable rise of the next online predictive market. With InTrade out of the way, some other online gambling site — anyone from PaddyPower to Betfair — will grow into the hole created by InTrade, subtly open itself to U.S. customers, and likely reignite the legal battles with the CFTC all over again. Hopefully, next time around, cooler heads will prevail at the CFTC and welcome these predictive markets to the regulatory regime.

But I’m not buying that contract.

To Our Customers [InTrade]
A Prediction Market Mystery [Rajiv Sethi]
RIP Intrade: The Last, Best Hope for Pundit Accountability [Washington Post]
Now You Can’t Buy Your Crude Oil Futures In $10 Increments On Intrade [DealBreaker]

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Companies: intrade

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Comments on “Go Ahead and Short Your 'InTrade Will Come Back' Contract”

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special-interesting (profile) says:

InTrade is one of the more interesting tech developments. It combined tried and true trading methods with close public involvement. At some level this is just a vice action to corral gambling but such weak religious motivation is weird when compared to the huge billion dollar gambles that happen every day at the stock market.

Micro commodity transactions used for market prediction? Brilliant! There is a huge intellectual basis for studying the effect of putting your money where your mouth is. (sports betting)

The capricious jealousy of the CFTC’s one off behavior is typical of bureaucratic nonsense. Another new bright idea crushed by politics.

Corwin (profile) says:

Once more, with feeling

“An Internet service that was hosted on a central server located under US jurisdiction has been shut down because regulatory capture.”

Two articles per day on TechDirt to repeat over and over that you can’t set up any innovation in the US.

But… there is no regulation on reality. Get over it. Build the service as fully-distributed P2P and PROBLEM FUCKING SOLVED FOREVER. Can’t stop “hosting@Home” over TOR and I2P with all transactions in Bitcoins.

Distributed systems. The server is the swarm. That’s the one and only way. You can’t do more resilient than a net of equal independent agents.

I have exactly zero sympathy for those morons who insist on following regulations and get shut down because of the regulations they never knew, or failed at seeming to follow.

But then you wouldn’t be founding a company with VC money for hockey-stick returns, you’d be building something that will enrich you no more than any other user of your system.

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