Double Blind

About a week ago, Tradesports announced that they were closing down. Tradesports was the primary operation behind the prediction market, until in the beginning of 2007 they split up into Tradesports (which dealt with sports markets) and Intrade (which dealt with everything else).

The two entities were separate in name only; they shared the same back office, same software and same operations. There was a significant outage in 2008 that affected both operations at once which validates the assumption.

Sports was the prime money-maker for the operation, while the political markets were secondary. Initially, they didn’t think that political predictions would be the prime marketing point for the company, which is why they tried to split the company – to distance themselves from the “online gambling” market and into the slightly more credible “prediction market” sector.

On November 18, 2008 they announced they were shutting down the Tradesports side, presumably to distance themselves completely from that area. The fact that this was a couple months away from the most profitable money-maker in all of sports (the Super Bowl on February 1, 2009) was even more so odd.

As many that read this site know, I have profitably cleared a low 5-digit figure over the last few years from using prediction markets, but I have stopped using Intrade a few months ago. At the end of October 2007, I withdrew everything but a token sum in the account, and proceeded to squander that token amount on two fairly long-odds-but-good-value bets relating to the Democratic VP nomination and how long Hillary would last before she pulled out. The money I did pull out of Intrade (in a series of three or four cheques) did come in a timely fashion, and they did clear my credit union without issues.

However, I think this will change for future users, as I think Intrade’s financial viability is in question. There are a few signs out there.

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.

Of course, knowing him for all of 20 minutes at this point, I didn’t really care to be used as a social stepping stone, and more or less said that there is a lot of talent available in downtown Vancouver. I wasn’t about to give him a rolodex of names and phone numbers.

Once he realized that he was getting nowhere with me (which was very apparent), the conversation shifted to small-talk again and that was about it. At least he paid the bill. The whole meeting left a bad taste in my mouth.

If this is his style, I can see why the business is taking a hit. It’s amazing that Intrade has gotten to the point where it is today, quite by accident.

I would highly recommend to stay away from Intrade as your money is likely not safe, and I will not be using their service again.

This entry was posted on Thursday, November 27th, 2008 and is filed under Commentary. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.