Monday, December 5th, 2016

Busting the Intrade “market”

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Kevin Binversie brings us the news that Intrade will be shutting down their American accounts. The decision came after a lawsuit by the Commodities Futures Trading Commission.

Intrade, which is operated by the Irish firm Trade Exchange Network Ltd. was a favorite reference point for political prognosticators, who pointed to futures being traded on the outcome of the presidential election as a reflection of the odds facing each campaign.

The Commodities Futures Trading Commission sued Intrade and TEN on Monday for offering commodity options contracts between September 2007 and June 2012 in violation of the agency’s ban on off-exchange trading.

According to the suit, the CFTC claimed the firm filed false certification forms stating that Intrade limited its offerings to eligible market participants. The agency also claimed that TEN violated a cease-and-desist order, signed in 2005, covering similar conduct.

“It is against the law to solicit U.S. persons to buy and sell commodity options, even if they are called ‘prediction’ contracts, unless they are listed for trading and traded on a CFTC-registered exchange or unless legally exempt,” said David Meister, director of the CFTC’s Division of Enforcement.

While it runs like a “market,” Intrade is really just a means of wagering.

Because a market will always settle at either $0.00 or $10.00, all shares are bought or sold at prices somewhere in between. The price at which you buy or sell shares will determine how much you can win, and how much you can lose.

When you buy shares you make a profit if the price of the market goes up. Your profit is maximised if the market is settled at $10.00. If you sell shares then you make a profit if the price of the market goes down. Your profit is maximised if the market is settled at $0.00.

Let’s look at a couple of examples…

You buy shares at a price of $7.00. If the market settles at $10.00 then you have a profit $3.00 per share. If the market settles at $0.00 then your loss is $7.00 per share.

Let’s say you sell shares at $4.50. If the market settles at $10.00 then you lose $5.50 per share. If the market settles at $0.00 then you have a profit of $4.50 per share.
Where do my profits come from?

Your profits come from the losses of those on the other side of your prediction.

There are always two sides to every prediction. If you make a prediction by buying shares, then someone is making the opposite prediction by selling you those shares – you are saying yes, the event will happen, they are saying, no it won’t. If you predict correctly your profits come for the person who sold you the shares – the person who predicted wrongly.

As a predictive model, it was about as useful as the point spread betting line on a football game. (Always amazes me how many people think the purpose of the point spread is to predict the outcome of a football game.)

But, as I’ve joked here often enough, gambling on an election is wrong, and probably illegal.

“Gambling is illegal at Bushwood sir, and I never slice.”
– Judge Elihu Smails

So if you’re itching to do some gambling on the Illinois 2nd Congressional special, you’ll have to find a bookie or fly to Las Vegas.

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