In the comments section to a post on the prediction market Intrade the other day, long time reader Billy Ray Valentine (poooosibly a very clever pseudonym) pointed out that I had exhibited uncanny prescience in a previous post where I discussed how ripe for legal action Intrade could potentially be. The comments in question were made by me in response to Mr. Valentine's query as to how Intrade differed from any other, existing derivatives market. With Intrade in much the type of legal trouble I had predicted, I thought a post of my response might be interesting for readers. For reference, the original post which prompted the discussion can be found here.
Good evening Billy Ray,
As someone with a profound interest in
derivatives markets, I suspect that you have already formulated your own opinion
with regards to that question. Nonetheless, I fell compelled to respond.
Therefore, what follows are my thoughts on the idea that I think you are driving
Depending on how one defines 'derivative', the most straight forward
answer to your question is that there really is no difference between Intrade
and any other derivatives market. In both cases users are writing contracts
based on their prediction of whether or not an underlying event will occur.
Extending this concept, one could argue that there is no substantive
difference between betting on whether President Obama is going to be reelected
and writing an option contract based on a theory that a stock might decline in
price. Or maybe you would prefer comparing the Obama bet to writing a futures
contract based on an orange market report?
In case someone reading this
thinks that I am just playing semantics games to make a point, the lack of a
difference really couldn't be any clearer in some cases regardless of how you
define derivatives. For example, Intrade offers contracts on Dow prices on
certain dates. Contracts to do the same exact thing are some of the most highly
traded instruments on futures exchanges!
So if the contracts on Intrade
themselves are akin to other derivatives products on regulated markets, why
isn't Intrade treated the same way as the CBOE? The most simple answer is lack
of regulatory resources/desire/pressure.
My guess, and I would stress
that this is only a guess (albeit based on assumptions made from following such
things over the years) is that for one, some, or all of the reasons above,
regulators are simply letting platforms such as Intrade be for the time being.
As we have argued on this page in the past (notably in our article
review regarding Timothy Lynch's 'new paradigm' for defining derivatives),
regulators and legislators are aware of these markets, and they are aware of how
they operate. It is not like they are shrouded in secrecy. Something I read, if
true, supports this; that is that that one cannot use US-bank issued debit or
credit cards to open an Intrade account (I haven't verified this personally).
While this isn't really casting a blind eye, and while it shows at least
a de minimus interest by regulators, this clearly isn't the same as blocking
access, or regulating the platform outright.
Why? With the much bigger
problems they are dealing with in the financial markets, the relatively small
dollar amounts at stake in prediction markets and the fact that Intrade is not a
domestic company, it seems probable that the powers-that-be have done a
cost-benefit analysis and have decided that the resources/time to shut Intrade
down are not worth the payoff. This idea is supported by something else I read
about the platform, which is that the CFTC has simply ignored requests for legal
clarification of Intrade's status from the company itself in the past.
Now, this 'allowing by ignoring' relationship could change at any time.
Certainly US regulators have thrown their weight around when it comes to online
gambling sites, even when they have been housed offshore. If some kind of
scandal arose from Intrade, or if regulators decided to flex their muscles a
bit, it wouldn't be a shock to see Intrade disappear at least from our shores.
However for now, while the regulators are away, the wonks will