InTrade, the first prediction market with 50m+ users and $200m+ wagers

While reading the book by Blockhead called, Seat Open — A memoir of Poker, degeneracy, and Friendship, It reminded me of InTrade

Background

• InTrade was founded in 1999 and later acquired in 2003 by Tradesports who operated the websites Intrade.com, Tradesports.com, WallStreetSports.com, Prediction-X.com
• Intrade’s system was one of the first prediction market trading exchange. Members could take positions (trade ‘contracts’) on whether future events will or will not occur. This could include a political election, climate change, current events or entertainment etc…
• Because events took place over a well-defined time span and have a well defined outcome, traders can trade both before and during an event. The political elections were really the main blockbusters

Regulatory uncertainties and product market fit

• InTrade was operated from the Republic of Ireland and in 2005 applied to the U.S. CFTC for permission to open a regulated futures exchange in the United States. But the CFTC did not give much insight and in 2008 the company decided to send a letter:

“While Intrade serves a global community and has registered members from 162 countries, our 82,000 plus membership are predominantly resident in the United States … it is perversely unclear as to whether Intrade, and indeed myself, are considered persona gratis by the United States”

• The 2012 US presidential election was a bellwether media event for Intrade with web traffic of 50m+ monthly page views in October and November and 100+ of media mentions related to the accuracy of the Intrade markets. During the 2012 election, related contracts represented over $200 million worth of wagers
• On 26 November 2012, the CFTC filed a civil suit in federal district court in Washington, D.C. for unregulated trading in traditional commodities seeking an injunction against Intrade allowing U.S. citizens to trade on their site
• The US CFTC claimed that Intrade’s operation interfered with the CFTC’s role “to police market activity and protect market integrity”. The CFTC shared that it was illegal to sell futures contracts in the US without being a US registered exchange or with a special exemption
• On 23 December 2012, Intrade closed all US-based member accounts. Trading volumes suffered a dramatic decrease without participation from US customers. On 10 March 2013, Intrade suspended all trading
• In addition to regulatory challenges, the company faced other problems including the death of its CEO, John Delaney, and potential market manipulations due to outsize bets on presidential-election contracts that may have distorted the market in 2012
• Unlike other platforms, the monetary incentives brought people into a market ensuring liquidity and making the market efficient

What’s next?

• The ‘new InTrade’ is called PredicIT and was started in 2014. Unlike InTrade, it is setup as a nonprofit educational project by the Victoria University of Wellington, New Zealand. The company also secured a no-action letter from the CFTC
• Though this has come with some restrictions including max 5k traders per questions and a cap of $850 per user per question. These limitations seems to affect the market efficiency of the system and create some ‘arbs’. Nevertheless, PredicIT is often described as the most robust prediction markets
• Also started in 2014, August is a decentralized oracle and peer to peer protocol for prediction markets. Its protocol based on Ethereum is free, public, open source software. In many ways, Augur seems the logical next step for prediction markets leveraging an open platform and features such as arbitration market and automatic betting. The latter is less discussed (at least on my knowledge) but seems important. Bots could automatically give predictions based on models increasing the liquidity and volume and thus the veracity of predictions. More on this on a great post by ConsenSys. Some great companies like Guesser are building on top of Augur.
• For many InTrade users, the 2012 election was a challenging experience as many US users were not able to retrieve their funds due to the CFTC enforcement. Not your key not your coin! I let you read Seat Open if you want to learn how the author was able to retrieve his winning bet ;)
• / la fin