Posted: November 29, 2012
The "prediction market" site Intrade's decision to close in the U.S. highlights how the company exists in a regulatory gray area, somewhere between trading and betting. Intrade says it hopes to operate legally in the U.S. eventually. In the meantime, American users must close their accounts by year's end.
Ireland-based Intrade lets users bet money on all manner of predictions — like if a particular film will win an Oscar. The site is ceasing operations in the U.S.
The popular website Intrade allows its users to bet on the odds of almost anything — like whether Syrian President Bashar al-Assad will get ousted by a certain date, or whether the movie Argo will win best picture at the Oscars.
This week, Ireland-based Intrade announced that U.S. users will have to unwind their bets and shut down their accounts by the end of the year. That's after the Commodity Futures Trading Commission sued Intrade for operating an unregistered exchange.
Transactions on the site have long resided in a gray area in the U.S., with little clarity as to whether they represent gambling, futures trading or something else that should not be regulated — leaving some questioning the legal basis for cracking down on so-called "prediction markets."
'More Accurate Than Pundits'
"Conceptually, to an economist, there's not a difference between betting and trading — apart from the fact that one sounds more polite than the other," says Justin Wolfers, who grew up in Australia working for bookies taking bets.
Now a University of Michigan professor who's studied Intrade, Wolfers says the site is not just a venue for winning and losing money. It also generates news as a byproduct, he says. That is, the odds on Intrade are almost always right.
"It tends to be more accurate than pundits, it tends to be more accurate than polls, and in the past it's even more accurate than very sophisticated poll-watchers like The New York Times' Nate Silver at FiveThirtyEight.com," Wolfers says.
To use Intrade, members place bets on yes-or-no questions. Much like a stock, the price of placing a bet fluctuates based on demand. And when the outcome is determined, the payout is either $10 or nothing. If you win, your profit is that $10, minus the price you paid to place your bet.
According to Thomas Bell, a professor at Chapman Law School in California, the CFTC considers those transactions enough like pork belly futures — which fall under the commission's authority — to be shut down.
Bell says prediction markets that allow trading on current events are still a very tiny — and very new — segment that occupies a gray area of the law.
"It's not clear under U.S. law at present whether it's gambling, whether it's commodities futures trading, or whether it's securities," Bell says. "There's terrible uncertainty."
The CFTC's complaint equates predictions with regulated options trades — the kind of hedges farmers use on crops. It also charged Intrade's parent company with violating a cease-and-desist order. Neither Intrade nor the CFTC commented for this story.
But to Bell, prediction markets are neither games of chance, nor economically significant markets. He says it's a matter of free speech. "It's important to let people put money behind their claims, because it incentivizes honesty," he says. "And it also incentivizes people to go out and find the truth. And those are both great things."
Wall Street analyst Lawrence Lau agrees. "It's not a gamble because it's not luck that affects the outcome," he says. Lau spends 10 hours a week on Intrade, researching probabilities. He says he's made 60 percent returns on his money in 2012, which he plans to use for graduate school.
Lau says the government's suit is ridiculous. "I didn't really believe it when I first saw it," he says. "But when I looked into it I thought, 'This is a waste of the taxpayers' time and money.' "
Hopes For A U.S. Return
Elsewhere on Wall Street, Jason Ruspini, a hedge fund firm executive and former Intrade user, embraced the government's action.
"These things really do need to be regulated," Ruspini says. "And I'm sort of happy that the CFTC is cracking down because without regulation, there's no accountability."
Specifically, Ruspini says, he suspects some Intrade users try to manipulate prices.
"I honestly think that is part of the attraction for a lot of Intrade users," he says. "They feel a sense of power. ... They may be able to move the price on things they may not even know about."
Meanwhile, Intrade posted on its website it hopes to eventually announce plans to operate legally in the U.S. But without specifics, legal experts say, it's hard to know whether that prediction is a safe bet.
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