(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
By Robert Cyran
NEW YORK, March 11 (Reuters Breakingviews) - Intrade sheds
light on how quickly gray markets can go dark. The site, which
took bets on everything from elections to oil prices to its own
demise, was abruptly shuttered on Sunday. While Intrade's
predictive record was good, it didn't foresee the rising
controversy over under-regulated speculation. It's a cautionary
tale for others operating in a somewhat shadowed zone.
What halted Intrade isn't clear. The Irish company said it
discovered problems, including possible "financial
irregularities." Regulators already had come calling. In
November, the U.S. Commodity Futures Trading Commission filed a
lawsuit that prompted the company to close its site to U.S.
The pseudo-exchange occupied a niche that overlapped with
futures dealing, online gambling and secondary market trading.
Eventually, the CFTC decided that predicting the price of gold,
for money, was the same as investing in the future price of a
commodity, and that Intrade therefore wasn't stopping ineligible
U.S. customers from making wagers.
Other similar sorts of markets have met a similar fate. In
2006, U.S. lawmakers cracked down on overseas gambling sites by
prohibiting banks and credit card companies from processing
related payments. It eradicated big slugs of market value for UK
companies PartyGaming and 888.com.
Others, like fantasy sports site StarStreet, are still
flourishing. The company says its operations are legal because
games where competitors create fictional teams using real-life
professional athletes are based on skill and therefore exempt
from the same 2006 law.
Exchanges like SecondMarket, which allow trading in the
equity of private firms including pre-IPO Facebook (FB.O), have
been gradually becoming more accepted. The recently passed JOBS
Act simplifies compliance and expands the number of eligible
companies. Last week's announcement by Nasdaq (NDAQ.O) that it
was forming a joint venture with SharesPost underscores their
Yet markets in unlisted companies, even big ones like
Twitter, provide less disclosure and are far more illiquid than
public ones. The collapse of Germany's small-cap Neuer Markt
after the dot-com bubble and the shrinkage of London's AIM since
2007 are cases in point. Even Goldman Sachs (GS.N) couldn't
attract enough investors to sustain its GSTrUE marketplace. If
regulators don’t catch up with gray-zone operators, other forces
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- Intrade, the predictions site that allowed people to place
bets on events such as the U.S. presidential election, on March
10 stopped all trading after discovering "circumstances ...
which may include financial irregularities." Open contracts were
settled at market prices. Accounts will be frozen until further
notice, according to a notice on the company’s website.
- The U.S. Commodity Futures Trading Commission filed a
lawsuit last November accusing Intrade of violating its
off-exchange options trading ban by letting U.S.-based customers
wager on the price of commodities such as oil, and filing false
claims with the agency. The company closed its site to U.S.
bettors shortly after.
- CFTC civil complaint press release: link.reuters.com/baz56t
- Reuters: Prediction market Intrade halts trading,
investigation on the way [ID:nL3N0C30VS]
- For previous columns by the author, Reuters customers can
click on [CYRAN/]
(Editing by Jeffrey Goldfarb and Martin Langfield)
Keywords: BREAKINGVIEWS INTRADE/
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