Intrade shut down this week, and the reasons behind its closure remain extremely mysterious. The site, which billed itself as "the world's leading prediction market," was a major home for gambling (with real money) on real-life events... most notably the 2012 election in the U.S. During the election, Intrade usually showed Romney having a much higher chance of winning (around 30-40%) compared to other, more closely regulated online markets (which only gave him around a 20% chance or less). As a result, some news outlets have suggested that those election predictions were actively being manipulated.
The Intrade shut down came after a rough and controversial few months for the company, which cited "financial irregularities" as the proximate cause for the shutdown. The site immediately halted all trading on prediction markets, settled all open positions for all its customers, and - most alarmingly - shut down all financial transactions "for all existing Company accounts." The potential severity of the irregularities also forced Intrade to state that "it is not possible to make any payments to members... until the investigations have concluded." In short, all Intrade members are screwed - at least for the moment.
What caused the Intrade shut down? The most significant factor by far seems to be the shutdown of all the U.S. prediction markets. After the Commodity Futures Trading Commission sued the site in November for violations of securities law on futures trading, the site forced all its U.S. users to close and cash out their accounts. Intrade also ended all real-money trading in the United States.
The Intrade shut down would almost certainly have happened a few months earlier if it were a U.S. based site. It isn't; the site is based in Dublin. Nevertheless, the vast majority of its traffic came from the United States. The site barely executed fifty thousand trades in 2013 to date, compared to a million in 2012. Obviously, 2013 is still fresh, but that is still a far cry from the site's previous average of eighty thousand monthly trades.
Thus, the Intrade shut down most likely has a benign explanation - they lost the vast majority of their market, ran out of money, and had to shut down. But phrases like "financial irregularities" tend to - and ought to - set off warning bells. The site could potentially reopen once the investigation concludes, but considering the totality and abruptness of the shutdown, that seems somewhat unlikely.
The U.S. Intrade shut down in November may well have been prompted by potential irregularities in the site's handling of the 2012 election, unsurprisingly one of its largest prediction markets (the new pope was another up until the shutdown). According to "The New Yorker," some journalists and experts suspected that the discrepancy in Romney's victory chances hinted at outside manipulation of Intrade's markets. That is, deep-pocketed Romney supporters may have tried to skew the apparent odds in Romney's favor in order to bolster his chances.
The persistence of such disparate odds over a long period of time strongly suggested either that manipulation was occurring or that the site's markets were substantially less liquid than Intrade itself suggested. Either way, the Intrade market was less efficient than most supposed.
The Intrade shut down in the U.S. almost certainly resulted from the increased attention on the site after the 2012 election. That attention led to the securities suit, which led to its closure in the U.S., which led to the "financial irregularities" that forced it to halt all operations.
At least, that's the easy - or naïve - explanation behind the Intrade shut down. Whether it is the correct explanation remains to be seen. For the moment, though, legal online gambling in the U.S. is harder than ever - and a lot of bettors can't get their money out of a company under financial investigation. None of this is good news, and no one should be happy about it.