Case Study 1: The Rise and Fall of InTrade

"InTrade's failure was not a failure of prediction markets. It was a failure of corporate governance in a prediction market company." — Paraphrased from multiple post-mortems

Overview

InTrade was, for over a decade, the world's most prominent prediction market. From its launch in 2001 to its sudden closure in 2013, InTrade provided real-time probability estimates for hundreds of political, economic, and current-affairs events. Its prices were cited by The New York Times, CNN, Fox News, and academic researchers alike. When InTrade collapsed, it was not because its markets failed — they were remarkably accurate — but because the company around them failed.

This case study examines InTrade's complete arc: founding, growth, peak influence, regulatory battles, and ultimate collapse. It then considers what data survives from InTrade's markets, what lessons modern platforms have drawn from its experience, and whether the "InTrade model" could succeed under today's regulatory environment.

1. Founding and Business Model

1.1 Origins in Sports Betting

InTrade's origins lie in TradeSports, a sports betting exchange founded in 1999 by John Delaney and Ron Bernstein in Dublin, Ireland. TradeSports used the exchange model — participants bet against each other rather than against the house — which offered better odds for bettors and lower risk for the platform operator (which earned a commission on each trade rather than bearing directional risk).

Ireland's regulatory environment was permissive. Licensed betting operators could legally serve international customers, including those in the United States. This jurisdictional advantage was central to the TradeSports/InTrade business model.

1.2 The InTrade Spin-Off

In 2001, Delaney launched InTrade as a separate platform for non-sports event contracts. The initial offerings were modest — contracts on award shows, business events, and a few political questions. But Delaney recognized that political prediction markets had a unique appeal: they attracted media attention, generated free publicity, and appealed to a different (and potentially more affluent) demographic than sports bettors.

1.3 How InTrade Worked

InTrade's contract design was elegant in its simplicity:

• Binary contracts: Each contract paid $10 if a specified event occurred and $0 if it did not. (Some contracts used $100 payoffs.)
• Continuous trading: Contracts traded on a continuous double-auction order book, with bid and ask prices visible to all participants.
• Price as probability: A contract trading at $6.50 (on a $10 contract) implied a 65% market-estimated probability that the event would occur.
• Commission model: InTrade charged a small per-contract trading fee and an additional fee upon settlement.

The system was straightforward enough for a novice to understand but rich enough to attract sophisticated traders. At its peak, InTrade had approximately 100,000 registered users, though active traders numbered in the thousands.

2. Key Markets and Memorable Moments

2.1 U.S. Presidential Elections

InTrade's election markets were its crown jewel. For the 2004, 2008, and 2012 presidential elections, InTrade prices became a standard reference alongside polls and forecasting models.

2004 (Bush vs. Kerry): - InTrade's final price gave Bush approximately a 55% chance of winning. - On election night, InTrade prices reacted to returns from Ohio faster than the major television networks called the state. - Post-election analysis showed InTrade correctly identified the winner in 49 of 50 states.

2008 (Obama vs. McCain): - InTrade correctly predicted the winner of every state except Indiana (Obama won by 1%) and Missouri (McCain won by 0.1%). - The market tracked the financial crisis in real time: Obama's probability surged from around 55% in August to over 90% by late October as the economic collapse favored the challenger.

2012 (Obama vs. Romney): - InTrade's final price gave Obama approximately a 67% chance of winning. - This was less confident than Nate Silver's FiveThirtyEight model, which estimated approximately 90%. - Post-election debate centered on whether InTrade had been "too close to call" while Silver had been more decisive. Some researchers argued that InTrade's prices were distorted by the platform's declining liquidity and regulatory problems.

2.2 Supreme Court Decisions

InTrade hosted markets on Supreme Court decisions, most notably the 2012 ruling on the Affordable Care Act (National Federation of Independent Business v. Sebelius). The market assigned roughly a 75% probability that the individual mandate would be struck down. When the Court upheld the mandate — with Chief Justice John Roberts providing the decisive vote — InTrade's price crashed instantly, illustrating both the market's speed and its fallibility.

This episode is instructive: prediction markets are not oracles. They reflect collective judgment, and collective judgment can be wrong, particularly when outcomes depend on the private deliberations of a small number of individuals (in this case, nine Supreme Court justices).

2.3 The Saddam Hussein Contract

One of InTrade's most famous episodes involved a contract on whether Saddam Hussein would be captured by a specific date in late 2003. On the afternoon of December 13, 2003, the contract price spiked dramatically — hours before the U.S. military's official announcement of Hussein's capture in Tikrit.

The spike was widely cited as evidence that prediction markets could detect breaking news before traditional media. It also raised concerns about insider trading: someone with knowledge of the military operation (or advance knowledge of the announcement) could have profited by buying the contract before the public announcement.

2.4 Financial Crisis Markets

During the 2008-2009 financial crisis, InTrade hosted contracts on: - Whether the U.S. would enter a recession (defined by NBER dating) - Whether the TARP bailout would pass Congress - Whether specific financial institutions (Lehman Brothers, Bear Stearns) would survive

These markets provided real-time public information that was otherwise available only through opaque credit default swap markets accessible only to institutional investors. For retail observers and journalists, InTrade was the most accessible window into market expectations about the financial system's survival.

3. Regulatory Battles

3.1 The CFTC and TradeSports (2005)

In 2005, the CFTC filed a civil complaint against TradeSports, alleging that the platform had offered commodity-related futures contracts (specifically on gold and currency movements) to U.S. customers without proper registration. TradeSports settled the complaint, paying a fine and agreeing to stop offering commodity-linked contracts to U.S. residents.

This action was a warning shot. The CFTC was asserting jurisdiction over event contracts offered to U.S. participants, even when the platform was based overseas. Delaney chose to interpret the settlement narrowly: TradeSports would stop listing commodity contracts, but InTrade — which traded political and current-affairs contracts — would continue serving U.S. customers.

3.2 The Dodd-Frank Implications (2010)

The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law in July 2010, gave the CFTC expanded authority over event contracts. Section 745 of the Act specifically addressed "event contracts" and empowered the CFTC to prohibit contracts involving: - Activity unlawful under state or federal law - Terrorism - Assassination - War - Gaming (as defined by state law)

The gaming provision was particularly concerning for InTrade, since political betting was classified as gambling in many U.S. states. Dodd-Frank essentially gave the CFTC a legal basis to shut down prediction markets that might previously have existed in a regulatory gray zone.

3.3 The CFTC Lawsuit (2012)

In November 2012, the CFTC filed a civil complaint directly against InTrade. The complaint alleged that InTrade had: 1. Offered illegal off-exchange options trading to U.S. customers. 2. Failed to register as a designated contract market or swap execution facility. 3. Violated the terms of the 2005 TradeSports settlement.

InTrade was ordered by a federal court to stop accepting U.S. customers. For a platform whose user base was heavily American, this was a severe blow.

4. The Collapse

4.1 John Delaney's Death

On May 19, 2011, John Delaney died while climbing Mount Everest. He was 42 years old. Delaney had been InTrade's founder, CEO, and driving force. His death created a leadership vacuum at a critical moment — the CFTC was intensifying its scrutiny, and InTrade needed experienced leadership to navigate the regulatory challenge.

4.2 Financial Irregularities

On March 10, 2013, InTrade abruptly suspended all trading and posted a terse notice on its website:

"InTrade regrets to announce that it must cease trading activity at this time. ... We are currently investigating potential financial irregularities which have recently come to light."

The announcement was devastating to traders, many of whom had substantial balances on the platform. In the weeks and months that followed, the extent of the problems became clear:

• Commingled funds: Customer deposits had been mixed with company operating funds, violating basic financial custodianship principles.
• Unauthorized use of funds: Some customer money appeared to have been used for corporate purposes, including legal fees related to the CFTC litigation.
• Inadequate record-keeping: The company's financial records were incomplete, making it difficult to determine exactly how much money was owed to whom.

4.3 Liquidation

InTrade was placed into liquidation under Irish law. The liquidation process was protracted and painful. Customers ultimately recovered only a small fraction of their deposits — estimates range from 20-40 cents on the dollar, depending on the account.

The Irish financial regulatory system, which had been largely hands-off during InTrade's operation, was criticized for inadequate oversight. However, InTrade had operated under a general bookmaking license, not as a regulated financial institution, and the level of regulatory oversight was correspondingly limited.

5. Surviving Data

5.1 What Was Lost

When InTrade closed, it took with it one of the richest datasets in prediction market history. Complete order-book data, individual trading records, and the platform's entire historical database were locked behind the liquidation process. Much of this data has never been made publicly available.

5.2 What Survives

Despite the loss of internal data, a substantial body of InTrade data survives in various forms:

• Academic datasets: Researchers who had data-sharing agreements with InTrade retained copies of historical price data. These datasets have been used in numerous academic studies.
• Web archives: The Internet Archive (Wayback Machine) captured periodic snapshots of InTrade's website, preserving some contract specifications and prices.
• Media reports: Thousands of news articles from 2001-2013 cited InTrade prices, providing a partial but useful record of key market movements.
• Research papers: Dozens of academic papers analyzed InTrade data and reported summary statistics, price movements, and accuracy metrics.

5.3 Using InTrade Data Today

For researchers and students, InTrade data remains valuable for several purposes:

• Calibration studies: How well-calibrated were InTrade prices? When InTrade said an event had a 70% chance, did it occur approximately 70% of the time?
• Comparison benchmarks: InTrade provides a benchmark against which modern platforms can be compared.
• Event studies: InTrade's rapid response to breaking news (the Saddam Hussein capture, election returns, Supreme Court decisions) provides case studies in information processing.

The case study code file (code/case-study-code.py) includes synthetic but realistic InTrade data that can be used for these analyses.

6. Lessons for Modern Platforms

6.1 Governance Matters

InTrade's most important lesson is that prediction market accuracy is necessary but not sufficient. The platform's markets worked — its forecasts were generally accurate, and its information aggregation was effective. But the company around the markets was poorly governed: funds were commingled, leadership succession was unplanned, and regulatory compliance was adversarial rather than cooperative.

Modern platforms have internalized this lesson. Kalshi sought full CFTC registration before launching. Polymarket settled its CFTC enforcement action and restructured its operations. Both approaches — though different — reflect an understanding that prediction market platforms must be governed as trustworthy financial institutions, not as scrappy startups.

6.2 Regulatory Strategy Matters

InTrade's regulatory strategy was fundamentally adversarial: operate from Ireland, serve U.S. customers, and dare the CFTC to act. This strategy worked for over a decade, but when the CFTC finally moved, InTrade had no fallback position.

The contrast with Kalshi is instructive. By obtaining CFTC designation, Kalshi accepted significant compliance costs (reporting requirements, capital reserves, audits) but gained regulatory certainty. Kalshi can operate in the United States without fear of enforcement action, and its legal battles are fought in the courts rather than through clandestine efforts to avoid jurisdiction.

6.3 Customer Protection Matters

InTrade's commingling of customer funds destroyed trust not just in InTrade but in prediction markets generally. For years after InTrade's closure, potential prediction market users cited the InTrade experience as a reason not to participate.

Modern platforms address this concern through various mechanisms: - Regulated custodianship: Kalshi holds customer funds in regulated accounts. - Blockchain transparency: Polymarket's use of smart contracts on a public blockchain provides a degree of transparency that InTrade never offered. - Insurance and reserves: Some platforms maintain insurance or capital reserves to protect customer deposits.

6.4 The "Too Big to Ignore" Threshold

InTrade's regulatory problems intensified as it grew more prominent. When InTrade was a small, obscure platform, the CFTC had little incentive to act. When InTrade became a media fixture cited by every major news network, regulators could no longer ignore it.

This suggests a pattern that modern platforms should anticipate: growth attracts regulatory attention. Platforms that plan for regulatory engagement — rather than hoping to remain below the radar — are better positioned to survive the transition from obscurity to prominence.

7. Could InTrade Succeed Today?

7.1 The Regulatory Environment

The regulatory landscape for prediction markets is more developed today than in InTrade's era. The Kalshi ruling established that at least some event contracts are legally permissible under CFTC oversight. The existence of a regulatory pathway — CFTC DCM designation — means that a modern InTrade would not need to rely on jurisdictional arbitrage.

7.2 The Technology Environment

Blockchain technology offers solutions to some of InTrade's problems. Transparent, on-chain settlement eliminates the risk of fund commingling. Smart contracts provide automatic execution without requiring trust in the platform operator. Layer-2 scaling solutions offer low-cost transactions that can handle InTrade-level volumes.

7.3 The Competitive Environment

A modern InTrade would face competition that the original InTrade never had. Kalshi, Polymarket, Manifold, Metaculus, and others occupy the space that InTrade once dominated. Any new entrant would need a compelling differentiator — better liquidity, broader contract offerings, superior user experience, or a novel regulatory approach.

7.4 Assessment

InTrade's core insight — that a centralized, real-money prediction market offering a broad range of event contracts can attract substantial user interest and media attention — remains valid. Its execution failures were specific to its management, not inherent to its model. A well-governed, properly regulated platform offering InTrade-style markets could likely succeed today. Indeed, Kalshi is essentially an attempt to build "InTrade done right."

Discussion Questions

1. If you had been advising InTrade's management in 2010, what changes would you have recommended? Consider regulatory strategy, financial management, and succession planning.

2. Is the adversarial regulatory strategy ever justified? InTrade operated for over a decade by defying U.S. regulators. During that time, it provided valuable information to the public. Was the risk worth the benefit?

3. How should prediction market platforms handle the risk of a founder's death or incapacitation? What governance structures would you recommend?

4. InTrade's Saddam Hussein contract spiked hours before the official announcement. Should prediction markets restrict trading based on inside information? How would you enforce such a restriction?

5. Compare InTrade's collapse to the collapse of the FTX cryptocurrency exchange in 2022. What parallels exist in terms of fund commingling, governance failures, and regulatory evasion?

Key Data Points

This case study accompanies Chapter 2: A Brief History of Prediction Markets. See also: Case Study 2: Iowa Electronic Markets vs. Polls Code: case-study-code.py