I’ve mentioned Intrade here. Intrade, until recently, was an open prediction market. People from all over the world could place money — bet — on circumstances they expected to be true some time in the future. It was used to great effect during the recent presidential election here in the United States. Even as the talking heads in the media were pushing forward the inevitability of a victory for Mitt Romney, the money was on Barack Obama’s reelection.
Soon after the election, regulators forced Intrade to restrict access to customers from the United States. In this country, companies may only sell commodities options if they are registered through an exchange. By predicting the future prices of commodities like gold and currencies, Intrade was allowing its customers to trade commodities options, and there may be some room to argue that the outcome of future events not directly related to financial products — the outcome of elections or the selection of the Pope, for example — are too similar to commodities options to be excluded from the rules.
Even though Intrade and its parent companies are based in Dublin, Ireland, regulators from the United States pursued the company.
Before the beginning of the trading day today, Intrade’s operations ceased. A notice on the website’s home page indicates all customers will be able to receive the cash from their accounts based on the values of their options at the close of March 10. Customers are reporting, however, that they will be unable to withdraw their money until an investigation is complete. There’s no prediction contract indicating when customers’ money might be available again.
Had a proper regulator been able to extend its reach to Intrade, there’s probably no way the site would have frozen its customers’ funds.
It’s not clear why Intrade shut down its operations today without warning, but the message on the website indicates that it is in accordance with Irish law.
Prediction markets like Intrade can be and have been manipulated, just like commodities trading legally on exchanges. The nature of manipulation, however, is generally fair. If someone with a lot of money steps in to make a large enough trade that swings the market in one direction, usually with the intent of making an unlikely event seem more likely, others will, in theory, spot the opportunity to trade against the market manipulator. Market manipulation is illegal, and the Commodity Futures Trading Commission (CFTC) is the regulator tasked with of prosecuting those who try to manipulate markets.
Intrade is generally out of reach for the CFTC, though today’s shutdown may be an indication that the regulators, working in concert with government authorities, will go to extraordinary lengths. Is the market manipulation of Intrade any more troublesome than the manipulation that probably goes on in regulated exchange-traded commodities options? Or is it just that Intrade has positioned itself to be beyond the reach of regulators?
While Intrade doesn’t (or didn’t) offer options contracts on sporting events, there is little difference between these two types of activities. It’s gambling, and I suggest staying away. Intrade has been entertaining to watch; for events with large audiences, the predictions have proved to be generally very accurate. I wouldn’t put any of my own money into these options contracts, whether offered by a foreign company or one based within the United States with the proper exchange activity and regulation.
Should citizens all over the world be free to bet on the outcomes of future events free from regulation?
Here is the message posted on Intrade’s website as of this morning:
To Our Customers:
With sincere regret we must inform you that due to circumstances recently discovered we must immediately cease trading activity on www.intrade.com.
These circumstances require immediate further investigation, and may include financial irregularities which in accordance with Irish law oblige the directors to take the following actions:
- Cease exchange trading on the website immediately.
- Settle all open positions and calculate the settled account value of all Member accounts immediately.
- Cease all banking transactions for all existing Company accounts immediately.
During the upcoming weeks, we will investigate these circumstances further and determine the necessary course of action.
To mitigate any further risk to members’ accounts, we have closed and settled all open contracts at fair market value as of the close of business on March 10, 2013, in accordance with the Terms and Conditions of our customers’ use of the website. You may view your account details and settled account balances by logging into the website.
At this time and until further notice, it is not possible to make any payments to members in accordance with their settled account balance until the investigations have concluded.
The Company will continue the maintenance and technology operations of the exchange system so that all information is preserved properly.
We are not able to provide telephone support or live help services at this time, please contact the company by email at: [email protected]
We appreciate your custom and support over the years. We are committed to reporting faithfully the status of things as they are clarified and hope you will bear with us as we do all we can to resume operations as promptly as possible.
The Board of Directors of Intrade the Prediction Market Limited