Tuesday, October 28, 2008

Crisis = Opportunity

Prediction markets have a big role to play

Historic volatility, unprecedented coordinated bailouts, nationalizations, and bankruptcies of some of the doyennes of the financial elite are just some of the new realities we are all faced with.

Many may well be impressed with the speed and scope of the response to this crisis. I am, but it seems to me that Intrade and all in the prediction market industry have an increased obligation and opportunity to contribute to solutions in avoiding future crises.

Since Enron, WorldCom, Tyco et al and again since this crisis ignited we are being told that maximum transparency, disclosure, and better risk management tools are the answer. These solutions are exactly what prediction markets look to and can deliver.

But is something really transparent if it is buried within a 200 page document or if you need a degree in accounting to decipher it? Likewise, if the costs of producing or gaining access to the information is such that only a few benefit, is that maximum transparency and disclosure?

The Sarbanes-Oxley Act (SOX) introduced after the Enron / WorldCom debacles is considered a success by most. However, in light of recent events and comments from Henry Paulson, John Thain and even former AIG chief Hank Greenberg, who all believe SOX threatens the US competitive position in the global marketplace, it hardly seems a panacea.

This is where prediction markets can really help now and in the future. We offer real-time aggregated collective intelligence that is easy to access and interpret. E.g. recession, tax rates, unemployment, offshore drilling, OPEC actions, bank failures, etc. Prediction markets provide a single number -- the probability or risk of something happening. Right now there seems to be a 75% probability that the US will be in recession in 2009.

To get the best predictive information barriers to entry for participants and providers must fall so that adoption and diversity can grow. To contribute their maximum to society (which we expect will befit Intrade and other leaders in our industry) prediction markets need to be embraced, encouraged, and considered part of a solution to managing risks and change. Only when this happens will there be such diversity and adoption that the markets can reach their full potential in aggregating information on the most important issues.

In addition to new and revised regulations, the time is right for expanded coverage of those regulations to include prediction markets and the innovative solutions they offer. If ever there was a time to embrace innovative solutions for assessing and managing risk it seems that time came before I started to write this short note.

Prediction markets are far from perfect, but they typically deliver incentivized real-time, efficient, aggregated probability estimates on uncertain future risks and events. They have never had a more important role and potential than right now.

I welcome your comments.

John Delaney, CEO, Intrade.


Tuesday, October 21, 2008

We Want Talent!

I am likely to be severely reprimanded for using this forum to post a blatant advertisement. Apologies in advance.

While others are downsizing, and we face a reduction in trading volumes after the election we are still looking to add to our small team. This contrarian behaviour which you may rightly view as at-odds with crowd wisdom is probably another reason for being reprimanded.

If you are interested in being part of a small team who are passionate about the role and potential of prediction markets, a new niche that Intrade has in part created you will find details here.

Some additional information…
  • We have a small number of big initiatives that need additional resources
  • There are less than 20 full time people employed at Intrade everyone has the opportunity to have a big impact
  • Our comment to the CFTC on the treatment of prediction markets is here, and all industry comments are here
  • We have an exciting plan for a future that needs better information and transparency
If you really believe you have a lot to offer, I would love to hear from you.

Best regards,


John Delaney


Update October 28: We are thrilled to have received over 100 high quality applicants in the last week or so. It will take us a little time to work through them all and revert to people. Thanks for your patience in the interim.

Thursday, October 16, 2008

Price Variances on Intrade Political Markets

Intrade Comment on Alleged Manipulation in the Presidential Markets

There has recently been vigorous discussion of unusual trading activity on our political prediction markets. What could be motivating the activity has been subject to widespread speculation by academics, journalists, our own users and others. Some external commentators have claimed the unusual trading patterns indicate that our markets are being intentionally manipulated for political purposes. Others have gone further yet.

Part of the public utility of Intrade markets hinges on the quality, scope and usability of the predictive information they provide. Another part hinges on providing a marketplace where investors may assess and manage risk by trading on innovative markets.

The trading activity on our platform that is the subject of great speculation centers around two particular markets: 2008.PRES.McCAIN, and 2008.PRES.OBAMA. To a far lesser extent 2008.PRES.CLINTON(H). A number of such occasions are depicted in the charts below.

The trading that occurred during these times may be summarised as follows...

1. Multiple large volume Buy orders placed and matched rapidly caused the McCain market to move significantly above the previously prevailing market price by up to 10 pts.
2. Multiple large volume Sell orders placed and matched rapidly caused the Obama market to move significantly below the previously prevailing market price by up to 9 pts.
3. The market prices of the contracts then seemed to represent discrepancies between overlapping Intrade markets, and also between Intrade markets and similar markets on other platforms for some time thereafter.

We have carried out an extensive investigation into this matter including but not limited to...

1. A full and careful examination of the publicly available information on the trading - our exchange notably provides public free access to all time-and-sales and closing price data on all open markets.
2. A full and careful examination of all non-public information (orders, positions, accounts, IP addresses, physical addresses, customer documentation including copies thereof).
3. Communication both verbal and in writing with those involved.
4. Full and complete consideration of specific applications our Exchange Rules in light of the trading activity in question.

As a result of our investigations we would like to advise the following.

The trading that caused the unusual price movements and discrepancies was principally due to a single "institutional" member on Intrade. We have been in contact with the firm on a number of occasions. I have spoken to those involved personally.

We are satisfied that they are using our markets in good faith and in the ordinary course of their business and that there has been no contravention of our Exchange Rules. Our investigations lead us to believe that the member is using increased depth in these markets to manage certain risks.

Further, it is apparent that the cost of time in accumulating the desired positions by those "institutional" members responsible for moving the McCain market up and the Obama market down differs fundamentally to loyal "retail" members that Intrade relies on.

The Exchange views this unusual activity as an indication of the increased relevance and traction of Intrade markets as risk management tools coupled with the yet maturing state of the prediction market industry as a whole.

As our markets gain further fluency and are more broadly used to help manage risk (i.e. as they mature furtuer) we expect to see other cases where single, well-financed parties accumulate large positions in short periods of time in our markets and possibly distort prices away from prices on other platforms. As funds flow between platforms gets easier, arbitrage opportunities will last for far shorter periods that is currently the case.

In any and all future similar cases, we will diligently monitor the activity, the accounts and profiles of those responsible and take whatever action is in the best interests of all exchange stakeholders.

In an era when lack of transparency is rightfully being considered persona non gratis it is perhaps relevant to note again that we are determined to provide maximum transparency of all exchange activities free of charge including real-time market data, time and sales and volume as per the links at the bottom of this post. Additionally, we will start publishing more details about trading volumes and open interest on our exchange just as soon as possible.

We are thankful for your interest in this matter and in Intrade.

With very best regards

John Delaney

Update: See comment in the New Yourk Times http://www.nytimes.com/2008/10/20/business/20predict.html?ref=business