How the U.S. Killed Intrade, the Stock Market for Anything

Intrade, the online exchange that began in 1999 with the promise of letting people bet on everything from the weather to the Oscars to the presidential election, announced it was closing earlier this week.

While the site had become the target of regulators in the U.S. and its home base of Ireland, there was little warning of the closure. “Financial irregularities” was the officially cited reason that greeted anyone who visited the site after Sunday night. Of what exactly, the site's message doesn't specify. In any case, Intrade halted trading and closed out any remaining open positions, noting that they had to “cease all banking transactions for all existing company accounts immediately” in accordance to Irish law.

“During the upcoming weeks, we will investigate these circumstances further and determine the necessary course of action,” Intrade said in the statement. Bloomberg speculates that the forced shutdown had something to do with an audit last month by Caulfield Dunne Accountants & Registered Auditors, which raised red flags when Intrade’s Dublin-based auditor discovered dubious cash transfers to the company’s founder, John Delaney, that amounted to $2.6 million. Another issue there: Delaney died two years ago while attempting to scale Mt. Everest. Lost fifty feet from the summit, his body was never recovered.

As to why the exchange suddenly shut down, this is pure speculation, but the site was clearly experiencing a cash crunch after it found itself at the wrong end of a civil suit brought on by the U.S. Commodity Futures Trading Commission. Intrade let you bet on practically everything, which included events like where the price of gold might end up, crude oil, or even the S&P. More recently, traders bet on who the new pope might be.

Technically, these are futures. In the U.S., trading futures requires regulation. The suit meant Intrade had to lose its U.S. customers, which made up the majority of its base, by the end of 2012. With it, the company lost most of its revenue stream.

The effect was chilling. 52,166 trades totalling 363,517 shares had been executed this year, according to Intrade’s stats, versus over one million trades and 23.8 million shares in 2012. Without the necessary revenues to keep things going, Intrade may have dipped into its customer account balances, a mortal sin for any exchange, which are required to have a certain percentage of cash reserves in order to clear trades. If the CFTC was looking to take out its relatively small fry competitor, it did just that.

Intrade’s claim to fame was the exchange’s ability to give a reading on public opinion, which tends to matter a tiny bit more if you’ve put your money where your mouth is. The site gained mainstream recognition after correctly predicting the 2008 election and again, more famously, in 2012.

But as with any exchange, real market value is exposed only with proper liquidity and volume, something that Intrade never seemed to reach even at its loftiest heights. Even when it predicted Obama to win in 2012, Intrade's margins indicated a much closer race than did those of real bookmakers and Nate Silver’s polls, leading many to speculate that Intrade was being manipulated.

It wouldn't have been the first time. In October of 2008, Intrade revealed that a single trader had been making massive purchases in John McCain. With the media utilizing the exchange as one of many benchmarks for public opinion, one can assume that investing a few thousand bucks on Intrade made for a worthy campaign investment. And for a bet so thinly traded, a $10,000 investment could result in double digit swings. But that’s deceiving only if you mistakenly assumed the exchange to be a real reflection of market interests.

The overriding issue really is exactly what the CFTC lawsuit is protecting the general public from. While Joe the Plumber can throw some cash at the weather on Intrade, a similar futures bet on the Chicago Mercantile Exchange, which is geared towards institutional investors, simply isn’t feasible given minimum lot requirements and regulations.

Is one just internet gambling that can't be regulated, while another is acceptable? It's not like regulated exchanges aren’t vulnerable to manipulation. It simply requires that much more capital and subsequently, the stakes are that much higher and if anything, that much more dangerous. Still, the big boys are allowed to play while the little guy is left in the cold. Even if Intrade made some questionable money transfers in Ireland, its demise was directly instigated by the CFTC, whose public agenda is muddled by its commercial interest in keeping disruptive competitors from stepping on its turf.

Will Intrade or something similar be back in the near future? That’s hard to say. Other forms of more overt online gambling are gaining traction again. Pending proper regulatory groundwork, online poker is making its comeback. It’s only a matter of time until we catch up to Europe, where adults can play Hold ‘Em for euros with few qualms. There’s simply too much money at stake, a pot the government, given its debt woes, will eventually want to dig its fingers into.

Predictions betting's future will remain tenuous, however, given the bottlenecks of banking regulation, so we’ll have to wait and see how that plays out. Until then, we’ll have to rely on polls to gauge sentiment, which, with guys like Silver around, seem more accurate for the time being anyway. Or you can always get some Bitcoins. Anyone up for a game of Satoshi Dice?

@sfnuop