Friday 11 April 2014

Intrade Tradesports

US Presidents 44 and 45
I am indebted to Scott for this link to an interesting article at Business Week about Intrade, and their plans to return to life as Tradesports, focusing on sports rather than politics and more financial based markets this time around.

Intrade was riding high in November 2012, as its user base correctly predicted the presidential vote in every state but Florida. Less than three weeks later, it fell off a cliff. The U.S. Commodity Futures Trading Commission sued the company, claiming that its exchange illegally enabled speculation on the value of gold and currencies and on the probability of acts of war. Intrade’s legal problems quickly drove away users fearful of being dragged into the proceedings; within months the company could no longer cover its remaining customers’ deposits. It shut down in March 2013.

A year later, co-founder Ron Bernstein is putting the Intrade shingle back up. The lettering is different, though; in lieu of the political betting that made it famous, Bernstein is restructuring his efforts around a company called Tradesports that allows speculators to buy and sell positions on sporting events. The company is starting a private test period for the site on Monday and plans to make it publicly accessible soon. “Sports are always going to be the best laboratory for prediction markets,” he says. “All those things now are just recorded and data-mined and discussed.”

The focus on sports has particular appeal for a company that was originally located in Ireland because of its market’s questionable U.S. legality. Bernstein wants to take advantage of a 2006 law that exempts fantasy sports from federal prohibitions on sports gambling. So long as fantasy contests can be considered games of skill that don’t rely on the outcome of a single sporting event, people are allowed to play them for money. Bernstein, who left Intrade in 2003 because he felt he had to choose between running the company and living in the U.S., will run the new site from New Jersey.

Contests on Tradesports will consist of a series of markets, where players buy stock based on events within a game. To not run afoul of the law, players cannot simply buy stock on whether the San Antonio Spurs will win; the position must also include a bet on, say, how many rebounds Tim Duncan will pull down. A pot is set in advance, and the stocks can be traded throughout the game. When the final buzzer sounds, players holding stock with the highest combined value win the pot. The company takes a cut of the entry fees.

There’s already a cottage industry of markets for so-called daily fantasy sports. These companies market their activities as coming with the satisfaction of gambling without the legal risks. The leading site, FanDuel, has raised $18 million in venture capital and says it became profitable late last year. It expects to pay out $400 million in prizes in 2014. Another competitor, DraftKings, has raised $35 million and says it will pay out more than $200 million in prizes this year.

Intrade’s most prominent investors once included Wall Street legend Paul Tudor Jones and Lachlan Murdoch, Rupert’s son. They’re long gone, but Bernstein raised some new funding last year and says he has enough capital to run the site for at least 18 months. While Tradesports is technically a different company from Intrade, its staff includes several Intrade veterans and it’s built on the original site’s technology. Bernstein will run both companies. He’s trying to stock the Tradesports pond partly through e-mail blasts to Intrade’s 200,000 or so past users. He’s also pitching the new site partly as a spectator sport, where the betting action results in accurate predictions about playoff wins and draft picks.

There may be something to that. While there’s little reason to look at other daily fantasy sites if you’re not betting, the quality of Intrade’s predictions was key to its prominence. When traffic was at its peak, the site’s audience was five times its trading pool. Intrade was a particular darling of economists, who use prediction markets to study the way markets operate or to measure the potential effects of a presidential debate or a surreptitiously recorded fundraiser. “We’re using prediction markets for two distinct purposes, neither of which is to gamble,” says Dave Rothschild, an economist at Microsoft. Whether sports will hold as much interest as politics is an open question.

Tradesports marks a return to Intrade’s roots. Bernstein became involved in Intrade when an investor from his previous startup shared the idea of a stock market for sports. No one involved quite knew how to create one, and Bernstein agreed to help out, moving with the other founders to Ireland before Intrade went live in 2001. Bernstein soon realized that a company based on sports wagers ruled out a return to the U.S. He left the company and came home to start a new career trading gold and sugar futures.

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