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InTrade Users Pay a Price for Regulation

InTrade Users Pay a Price for Regulation

3 Mins
November 27, 2012

For a moment, it was exciting: InTrade seemed to be shrugging.

Yesterday, U.S. regulators sued InTrade —and InTrade responded by requiring its American users to close their accounts .

The regulators—the Commodity Futures Trading Commission— claim InTrade is running a market for commodities options . By a normal definition of “options” such as the one in the CFTC’s own online glossary , that’s not true: An option is a right to buy or sell something at a pre-set price, even if the market price when you use the option isn't as good. (If the market price is better, the option owner can decline to use the option and just buy or sell on the market.) But an InTrade prediction about the price of a commodity doesn’t give you the right to buy or sell the commodity any more than an InTrade prediction about the Academy Awards gives you the right to an Oscar: InTrade predictions are similar to a bet you might make with a friend who roots for a different sports team, where you each give some money to a neutral friend before the game and, after the game, he gives the money to the fan whose favorite team won. It's more complicated, because InTrade has found a way to make predictions tradeable, but the basis of the market is still that people who make correct predictions get money that was put up by people who made incorrect predictions. No one gets any claim to the thing the predictions were about, even if the predictions were about the price of something traded on some other market.

Both options and InTrade predictions allow people to profit (and risk loss) on their insights about the prices of commodities. InTrade thus offers an alternative to options.

Thus, getting rid of InTrade predictions on commodities would force people who want to profit from such insights to do so by means of regulated markets—to the profit of the CFTC’s regulated specialists, who would no longer have to earn their profits by competing with the InTrade alternative. Of course, in fairness to the regulated specialists, the regulations may well handicap them in that competition—but if so, getting rid of the InTrade alternative would make it harder to see that handicap, because the options industry would no longer be competing with an alternative that isn’t thus handicapped. It’s a common pattern: Regulators impose special burdens on the people they regulate, but also give them special protection against competition —instead of respecting the rights of producers to produce according to their judgment and the rights of consumers to select the products that suit them.

InTrade's response to the CFTC's suit—requiring Americans to close their InTrade accounts—was exciting because it seemed to be a rejection of the U.S. government's authority. That's how I took it in a previous (since deleted) version of this post: The U.S. government had proved so destructive to InTrade that InTrade no longer saw value in working under its "protection." But now it seems that InTrade does intend to continue serving American customers; it's just going to create a new system to do so, one it thinks will be less legally risky. Nevertheless, it's worth remembering that InTrade could have walked away (and still could), and that other businesses can shut down or leave the country if the government becomes too much of a threat and too little of a protector of rights.

But even what InTrade is doing is presumably bad for InTrade’s U.S. customers, citizens the CFTC supposedly serves. There is a certain justice in this. The United States just held a presidential election, well predicted on InTrade , in which almost all voters backed candidates who favor a regulated economy. Those voters who had InTrade accounts are now paying a price for that decision.

And here’s a prediction I wish I could sell on InTrade: there will be more such prices for them to pay.

H/T John Stossel .

Related: Atlas Shrugged .

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