On Sunday, the world's most famous predictions market, Intrade, was actively taking bets on who will be the next pope and whether the Democrats would keep the White House in 2016 — and then it wasn't.
Intrade said in a message on its website that "due to circumstances recently discovered we must immediately cease trading activity." These mysterious circumstances "require immediate further investigation, and may include financial irregularities," and so all customer accounts were settled at fair market value, to be paid out after the investigation is concluded. The company concludes with a shot of optimism, expressing "hope you will bear with us as we do all we can to resume operations as promptly as possible," but the rest of the statement "doesn't sound very encouraging," says Jeff Blagdon at The Verge.
What happened? Intrade says it is acting "in accordance with Irish law" — "you might know it as the e-oracle of American political elections, but the company is based in Ireland," says Derek Thompson at The Atlantic. It may be an American legal complaint, though, that gives us our best clue as to what went awry.
In November last year, the Commodity Futures Trading Commission filed a lawsuit against the company, claiming it was letting Americans bet on the price of commodities (like gold) on an unregulated exchange.... In December, the company suspended trading for all U.S. customers.... It is against U.S. law to buy or sell commodity options — that is, to bet on the future price of commodities, such as gold, copper, and oil — except on a registered exchange. [The Atlantic]
Intrade may have run afoul of similar Irish or EU laws, or a more sinister skeleton could be hidden in its closet. But as far as the U.S. market goes, Bloomberg's Elizabeth Dwoskin saw rosy skies ahead for Intrade fewer than two weeks ago. After the CFTC ruling, and Intrade's booting of its U.S. customers — i.e., most of its customers — "I wagered in an article that it was doomed," she says. But then the U.S. Justice Department suddenly started allowing states to experiment with online gambling:
Although the CFTC's lawsuit against Intrade is still pending, the Justice Department's new attitude appears to offer a way for Intrade to come back as a political betting site. The CFTC's complaint against Intrade takes issue with its futures contracts on currency prices and some current events, but not its line on politics. In a past ruling, the CFTC said that political betting is out of its scope.... You can bet that political Intraders in the U.S., who've been fuming since the company closed their accounts last fall, want nothing more than for Intrade to come back. [Bloomberg Businessweek]
Alas, it was not to be. "When it came to dealing with U.S. users, the company was always operating in a clearly gray area of the law, as it crossed the line into both futures trading and online gambling," says Joe Weisenthal at Business Insider. "But all legal issues aside, the premise of the site was awesome, and its most vocal critics were wrong."
The point of Intrade was to create a market where popular thinking was quantified.... The test of a market is not whether it's "right" but whether it adequately captures current information and the sentiment of informed participants. Intrade did a good job of that. Sometimes information is misleading and informed participants are on the wrong side of events, but that happens in every market in the world. If a stock runs up into earnings, and then earnings suck wind, and the stock collapses after hours, do we condemn the stock market for being flawed? Of course not. It just happens sometimes that participants get things wrong, and this happened on Intrade, although really not that often. [Business Insider]