Buzzfeed has an indepth look at how Intrade tired to toe the line between prediction market and gambling site, and due to its own internal problems, failed quite spectacularly.
Though Intrade was tiny, and based in Ireland for regulatory reasons, its backers included several billionaires and a passel of American hedge fund managers. The site reflected their gospel of quantification — the numerical ethic that has spread, in recent years, from the finance world to nearly every competitive facet of American life. Intrade says its users wagered a total of $230 million on the 2012 presidential campaign, which made it nothing more than a flyspeck in comparison to actual financial markets. But it attracted an avid community of traders — finance guys, card sharks, political junkies — most of them young men in their twenties, the Xbox and Red Bull demographic. They scoffed at the rubes, like the tea partiers who bet real money on Herman Cain. They competed for inside information, cozying up to political reporters and campaign workers. A few traders, the evidence suggests, employed the sort of bucket-shop tricks that might have gotten them handcuffed by the Securities and Exchange Commission if they had tried them in their day jobs. When they made a killing, the wolves of Intrade howled about it on the site’s message boards, and on Twitter.
On primary nights, Lau would sometimes call county clerks to pry out the latest voting numbers, before they reached news organizations. “That’s what I think a lot of Wall Street is,” Lau says. “Have an edge and don’t tell anyone about it.”
In his wagering, Lau gave similar weight to the teachings of Paul Tudor Jones — a Wall Street legend who was an early Intrade investor — and Billy Beane, the statistically minded baseball executive who was the hero of the book and movieMoneyball. His computer system owed something to Black-Scholes, a financial model for derivatives, and something to Nate Silver, the poll-crunching star of the 2012 election, then based at the New York Times. Though Lau’s winnings were modest — “five figures,” he says, money he was setting aside to pay for an MBA program — he thrived on the competition, and the stories, perhaps apocryphal, of traders who had hit big jackpots. “Some other guy,” he tells me, “bought a million-dollar condo in the Financial District with his winnings.”
The night of the 2012 election, Lau camped out in his office adjacent to his firm’s trading floor, taking advantage of the ultrafast internet connection to get an extra nanosecond’s advantage over the guys using their living room Wi-Fi. Meanwhile, down in Virginia, Joe Schilling — a communications professional who drove a car with the vanity plate “BETSMRT” — was sitting in front of three computer screens, monitoring the markets for individual states, which you could also bet on Intrade. “We were buying, hand over fist, Obama-Virginia contracts in the 40s,” he said, “and rode it all the way up to 100.”
Along with the reelected president, new modes of quantitative analysis were vindicated by the 2012 campaign season, which sometimes seemed as much a contest between dueling statistical models as ideologies and candidates. Journalists like Silver and the Washington Post’s Ezra Klein, and the Obama campaign’s own sophisticated numbers operation, were hailed as avatars of a new force of rationality in media and society. The nerds won.
But Intrade wasn’t given much of a chance to capitalize on the moment. Within months of the election, the company had collapsed beneath the weight of a U.S. government lawsuit and a crippling financial scandal. Some of the factors in Intrade’s demise — regulatory ambiguity, erratic management, a flawed business model — were ills common to many internet startups. Other travails, including the mysterious death of its longtime CEO on Mount Everest, were like plot twists from an adventure novel. But the root source of the market’s problems, defenders say, was a gap, perhaps unbridgeable, between a promising model for predicting the future, and the legality of Intrade’s betting parlor.
As New Yorkers cast their ballots for mayor, Lau could do nothing but rue the wasted profit opportunities. “What is gambling? Can someone define gambling for me?” he asks. “Is it putting money on an uncertain outcome? Then that sounds like Wall Street.”