Interview: Fairlay Prediction

Prediction markets and the elections

On Monday the U.S. Commodity Futures Trading Commission (CFTC) sued offshore prediction market operator Intrade, prompting it to close its doors to U.S. customers. This will likely kill Intrade in its current form. Non-U.S. customers appear sufficient to support contracts only on major political events, at least based on the modest offerings at Betfair (an exchange that does not accept Americans) and offshore bookmakers. We will likely lose real-money prediction markets on the wider range of subjects that Intrade offered (“Will the U.S. go to war with Iraq?”; “Will we find WMD in Iraq?”; “Will the deficit decline if Obama is elected?”). We will also lose a good platform for the development of new, even more interesting contracts.

Why did Intrade not operate onshore? The CFTC would not let it, or anything like it. While Monday’s complaint referenced only Intrade’s contracts on commodity prices and economic numbers, in April the CFTC rejected an application by another, unrelated firm, the North American Derivatives Exchange (NADEX), to operate onshore markets related to the 2012 elections. (This is what Intrade is best known for.) Election markets are crucial to the success of prediction markets, as they attract clients who then trade in other markets. Without election markets, NADEX has struggled to attract the volume of trades it needs for the contracts it is allowed to run.

When it denied the NADEX application, the CFTC argued that election contracts represented gaming that served no economic purpose. It argued that elections have no economic consequences worth hedging, and thus quantifying electoral risks in a market has no economic value. It also argued that election contracts could corrupt elections by creating monetary incentives to vote for a particular candidate.

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Popular Q&A

How accurate are prediction markets in US elections?

Like intrade for example in terms of prediction how US elections go? Historically how accurate do they turn out to be? I notice Rasmussen is using them to help predict how the Electoral College will go.

The March 2008 issue of Scientific American has an article about this titled "When Markets Beat The Polls":
Here is a quote: "professors [compare] the performance of the [Iowa prediction market] as a predictor of presidential elections from 1988 to 2004 with 964 polls over that same period and [show] that the market was closer to the outcome of an election 74 percent of the time."
You can read a draft of the full article here:
More anecdotal evidence: the favorite on the intrade prediction market won every US state in 2004 and every US Senate election in 2006.
There is a large amoun…

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