One prediction markets trader weighs in on the future of Intrade

Sacha Peter, at his blog Double Blind (via Chris Masse):

It is clear that they took some serious damage with their margin system and could not adequately protect their users’ funds - they announced that effective today that margin could no longer be used by members. (FYI, I never used margin). What happened is that there were some contracts that people leveraged up, and could not de-leverage without affecting the market price and were left with accounts with heavy negative balances, and corresponding positive balances on the other side. Since they had to pay off the people with the positive balances, they had to collect from the negative balances - something they obviously can’t do. They possibly took losses during the last presidential election (what would otherwise be a money-maker).

There are a few other red flags concerning Intrade, one being putting up a credit market on their own future viability - they actually have a market whether the business will still be in operation by a certain date! This is like buying insurance from a company with a policy on whether the insurance company will still be in business or not - if you “win” and the insurance company goes bankrupt, you still lose by not getting paid.

Intrade has had a history of showing very bad judgement on judging certain contracts. The North Korea Missile contract was a well-known debacle (one that I made money on because I knew they were stubborn enough to rule a certain way about it), and my ability to trust them on judging certain other markets correctly was highly suspect, so I only stuck to as-unambiguous-as-possible contracts.

One other issue with Intrade dealt with how its commission structure actually was used to take money from its customers through commission differentials - basically multi-candidate contracts (with a single winner) would have combined bid prices greater than 100% because of how the commission structure worked. Essentially the exchange would be able to arbitrage by selling contracts of everybody commission-free and make some money this way off the back of the people providing liquidity on the site. While this is not illegal or the moral equivalent of stealing, it is something that was rather disturbing about their model.

The other red flag dealt with the actual CEO of Intrade, John Delaney. He sent me an email on April 2007 out of the blue saying he would be in Vancouver and wanted to know if we could meet up. Apparently he had read somewhere that I made this presentation on prediction markets (he probably didn’t read further and realize it was at Barcamp, which is not exactly the most academically accredited event, although make no mistake - it was well worth going to). I said yes to the meetup, and we eventually met up for lunch at some Japanese restaurant in downtown Vancouver.

The conversation was fairly strange. It began with 10 minutes of small talk, about how he likes visiting the more “dodgy” areas of places, but after that he drilled me for contacts regarding software development and web-based user interfaces which caught me off guard.

I'm not withdrawing any of my Intrade funds (and will only do so after I recoup some of those long Giuliani losses).