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Tuesday, Oct 7, 2008
A growing market allows investors to make money off of disease and natural disasters. And so far, their predictions have been dead-on.
Dec 13, 2005 | On Nov. 1, Intrade, a Web site that allows people to bet on the likelihood of future events, issued a press release titled "Trading on Bird Flu -- 65% probability of U.S. case by March 2006!" The release announced that the trading activity on the exchange's bird flu contracts -- offering savvy "investors" a chance to gamble on when the first strain of the deadly H5N1 will be confirmed in the United States -- had doubled in the last month. The report, put out by Intrade P.R. executive Mike Knesevitch, ended with an ominous, sobering claim:
"Can these markets give us insight into global events like pandemics, hurricanes and politics? In the short history Intrade has put together, the answer is YES."
If these predictive markets are as startlingly accurate as they say, this spring the U.S. will get its first case of bird flu and some of us may die.
Intrade launched its two bird flu contracts -- one predicting that the potentially deadly, pandemic-causing Asian bird flu will hit the U.S. in December, the other that it will hit in March -- on Oct. 18. (The December contract is now trading at 6, meaning the market is currently predicting a 6 percent chance of the flu hitting the U.S. on or before Dec. 31, the March at 29.6.) Now, with close to $34,000 worth of investor money wrapped up in them, the bird flu contracts are among the most popular on the futures markets site, and company spokesman Brian Keating says he expects betting on the bird flu only to increase as the contracts' closing dates -- Dec. 31 and March 31, respectively -- approach and as more cases of the bird flu crop up around the world.
Contracts on the Intrade exchange can be bought or sold between other members, just as with any other stock exchange, but if an investor chooses to hold on to a contract price until closing, that investor can lose the entire amount invested -- or make a tidy profit. If, for instance, someone purchases a December bird flu contract at a purchase price of, say, $16, and a strain of H5N1 is confirmed in the U.S. on or before Dec. 31, that person wins whatever his or her buy price is against 100. In other words, the profit on each contract purchased at that price will be 100 minus 16, or 84 points, multiplied by 10 cents per point or $8.40. (Because contracts trade between 0 and 100 "points," you can think of the price at any time to be the percentage probability of that event occurring.) According to Keating, most investors buy about $500 worth of shares.
Even though the average trader doesn't spend tons of money -- some do, but most of it is recreational -- in this case, his or her winnings may come at a steep price for thousands of people, placing Intrade investors in a tenuous ethical quandary: Is this market offering the chance to win blood money?
The Business of Soothsaying
Intrade and its sports-minded sibling, TradeSports, are part of Trade Exchange Network Limited, a private corporation formed in Dublin, Ireland, in 2000. The trading exchange offers binary options on stock indexes, financial indicators, weather, politics, sports, entertainment, current events and legal affairs. The exchange network has more than 61,000 members in 123 countries and offers close to 2,000 unique contracts. Around 80 percent of its members are based in the United States, and 65 percent of its members are from the investment, banking and trading community. Many members make a living off of the exchange.
Unlike some online sports betting Web sites, Intrade and TradeSports do not profit off the outcome of events. There are commissions charged for trades (4 cents per trade executed on the exchange), but there is no "vig" -- a bookie's fee paid out on losing bets -- paid to the sites directly. Under the Wire Act, it is technically illegal to gamble via online betting sites in the U.S. -- or to solicit gamblers for an offshore site. However, Trade Exchange Network representatives say they're confident that, because they do not profit from the outcome of an event (read: no vig), they do not fall under Wire Act restrictions.
Futures markets traders, for their part, do not consider themselves gamblers, but investors: Instead of betting on the Super Bowl, TradeSports members "invest" in its outcome. The distinction may seem merely semantic, but unlike mere sports betting sites, the TradeSports/Intrade exchanges offer a more varied lineup of events on which to wager and may offer a glimpse into the outcomes of some of the most pressing current events. (Other futures markets, like the Iowa Electronic Markets and HedgeStreet, offer similar alternative markets.) In the five years since its inception, Intrade has been accurate in predicting elections, the new pope, the impact of Hurricane Katrina, and the capture of Saddam Hussein.
A recent example occurred on Oct. 21 with Supreme Court nominee Harriet Miers' confirmation contract. At approximately 8:30 that morning, traders monitoring the Harriet Miers confirmation process began aggressively selling contracts betting against her confirmation -- dropping her stock price 42 points in early trading. The following Thursday, Miers withdrew her nomination from the high court.
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