(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. punters.
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 continuing emergence.
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 often do.
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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)
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