The future of Intrade and Tradesports
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 [on Midas Oracle] 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.
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Quite damaging for InTrade and John Delaney —alas.
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UPDATE: See Sacha Peter’s comment, below.
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Previously: Why did John Delaney shut down TradeSports?
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Previously: on TradeSports death – on InTrade’s viability
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You guys better check the facts before making damaging assumptions…
Funds are ring-fenced.
Are my funds and personal information secure?
Yes! Trust, Security and Confidentiality are cornerstones of our Exchange in a similar way to a bank or other financial institution. Your Accounts are Segregated. To make sure we provide the highest levels of safety and security possible all customer funds are maintained in segregated bank accounts, totally separate from Intrade’s own capital. . These segregated accounts are maintained with some of Irelands largest banks. Safer by Design. If the Dow Jones crashes, the New York Stock Exchange doesn’t go bankrupt. In the same way, the Exchange doesn’t lose money when an unusual result arises. Whenever you trade, we will ‘freeze’ sufficient money in your account to cover your potential losses. If you lose, we simply transfer the already frozen money from your account to a winning customer account. If you win, we pay your winnings from a losing customer account. Member Specific Bank Accounts: Your funds and those of all exchange member funds are held separate and segregated from the Company’s own capital. To provide additional transparency we have introduced a unique service where an individual member can have a specific account established within the suite of segregated accounts. This service further separates your funds from those of other members and enables you to see on an individual Bank Statement your balance, and transactions. This service which includes receiving a periodic hard copy bank statement is being offered to members with $50,000 or more in their account for free. All other members can avail of this facility for $50p.m. For more details please email help@intrade.com
http://www.intrade.com/jsp/intrade/home/safety_and_security.jsp
Medemi, good point. I hope Sacha will read your comment.
Medemi,
Everything you say gets thrown out the window when the concept of margin is introduced. Also, the analogy to the NYSE is not true since the NYSE only facilitates the trade, they are not the counterparty. Intrade facilitates the trade and is the counterparty.
Intrade’s margin system failed to properly account for event risk. For example, let’s pretend on the Obama democratic nomination contract you could use 50% margin. And let’s assume you had two accounts with $1,000 each, both on margin.
Account A sells 4000 contracts of Obama at 50%, account B purchases 4000 contracts at 50%. Obama announces he’s quitting. Contract settles at 0 before there is an orderly liquidation.
Account A has a balance of $3000, representing $1000 of initial equity and $2000 of gains. Account B is at negative $1000, representing $1000 of initial equity and $2000 of losses.
Tell me that Intrade will be able to collect that $1000 from the account B. If Account A then decides to withdraw $3000 from his/her account, Intrade only has $2000 of equity to back that withdrawal – it has to come up with an extra $1000 from internal funds since the chances of collecting from B is very small.
You can see why they cut margin trading – too much of this was happening. Without margin, then they can make guarantees like the one you mentioned, but at significant loss of liquidity.
Cutting margin rates, in an environment like we’re in today, can be explained in a positive way as well as a negative way. Makes me think of when this CEO of a certain company was finally fired after having been heavily criticized. The share price dropped another 40% or so… Sometimes it seems people can’t do anything right, whatever they do. But, let me join you today and be real negative.
Betfair, you know this company, is under fire again. Quotes from betdaq today - you know this guy, it is Ed Murray, also known as DJ Sunset. And he’s on a roll.
“Something which isn’t widely known is that last year (2007) was i believe the start of betfair restricting the size of bets certain customers can place on certain markets. this happened with their tennis markets.
IF the growing number of internal betfair traders are allowed in the future (would david yu’s team tell us anyway? they didn’t with the trap bet robot) to look at who is betting on what, the end result will be smelly accounts getting max stake sizes, and the future internal betfair trader (under already announced pressure from the betfair board to outperform at least 98% of market participants) will see that smelly account x, with massive strike rate on player y, will have had its max bet of say £10,000 on a selection, and the trader will then himself lump on.”
Yep, sounds like betfair alright. This will happen, IMO.
“when hammersmith read this thread tomorrow and spend the day writing emails to betdaq pressuring for me, adonis, laylow, jd007, and anyone else who has dared to write anything on this forum (with the “everything everyone has posted is appalling fibs/libellous/slanderous etcetera, but no we’re not going to take people to court over it because we think we’d probably lose, we just want them all censored” stuff)…..”
Right again, DJ.
Let’s see if this link works so I can annoy betfair some more.
http://forum.betdaq.com/Topic21169-10-3.aspx
I guess people are entitled to decide what leaves a bad taste in their mouths, but I don’t see how “drilling” for contacts necessarily reflects badly on John Delaney as if it were a one-way exploitation with Delaney being unwilling to offer any favors in return.
I know Intrade took margin-related losses in mid-2007, but it’s a little surprising if they had more recently because one would think that all margins would have converged to worst-case loss well ahead of the election.
If think what surprised Sacha Peter is that John Delaney contacted and drilled him “out of the blue”. I can understand that. However, speaking for me, I like people who take a risk in creating the condition of a first contact with people they barely know. Sometimes, you meet interesting people that way. It’s rare, though.
“people are entitled to decide what leaves a bad taste in their mouths”
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in their mouth
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singular
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By the way, there is a problem with the titles of the comments. It’s due to a faulty plugin. I’ll contact the developer.
I suppose my point is that John Delaney and his team show a constructive approach when it comes to the future of prediction markets, and it’s not all about the money. Sure, mistakes are being made, but really, it’s nothing compared to the dubious (but profitable) business practices we can see with some other operators, which could have disastrous effects in the long run, to sports and general well-being worldwide. If we let them have their way with us customers, if the Gambling Commission let them. But that’s just my opinion. You guys, dream on.
Jason said – “I don’t see how “drilling” for contacts necessarily reflects badly on John Delaney as if it were a one-way exploitation with Delaney being unwilling to offer any favors in return.” – It was my impression that it was exactly this (except for the lunch, perhaps).
Everything else about the conversation highly suggested that John was very intelligent, and knew how to keep his cards close to his chest. I’m just not a type of person that you can develop a 10 minute relationship with as I don’t like introducing people I’ve known for 10 minutes to others without some form of knowing the person I’m dealing with isn’t going to annoy my contacts. For all I know, he could drill those people I would have referred to him for their contacts, etc. This would look bad upon me for making the introduction in the first place.
About margin trading, I know one of the major price spikes (down) on Obama was caused by a major liquidation from a margin trader that I know of. This person dealt with a 5-digit account. You are right, however, that closer to the election day they scaled the margin, so I have no way of substantiating the claim they lost money. However, consider that if there’s $10k of bad debt, 250,000 contracts need to be traded to re-claim that bad debt.
Chris Masse: I think your strategy of sending emails out of the blue says something. You asked for opinion, and not people’s rolodexes, an important difference.
http://www.cro.ie/search/submissionse.asp?number=436732&BI=C
Feel free to purchase the annual report and get a better look at Intrade.
“Chris Masse: I think your strategy of sending emails out of the blue says something. You asked for opinion, and not people’s rolodexes, an important difference.”
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I agree.
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