Feb. 23 (Bloomberg) -- On Feb. 15, Mitt Romney’s campaign held a conference call with political reporters to discuss the candidate’s prospects in the Michigan primary. Rick Santorum, who had just won contests in Colorado, Minnesota and Missouri, was leading by as much as 15 percentage points in state polls.
So how did Romney’s advisers reassure the media he was still the Republican candidate to beat? By pointing to Intrade, an online exchange where investors buy shares in a market that bets on political outcomes. The exchange predicted that Romney had a 73.8 percent chance of winning the Republican nomination, Bloomberg Businessweek reports in its Feb. 27 issue.
Started in 2001 for betting on sports and the Dow Jones Industrial Average, Intrade opened its political markets in 2004. The site has become a go-to source for the news media since the 2008 presidential race, when it predicted Barack Obama would win 364 electoral college votes. Obama ended up with 365.
Unlike traditional polls that come out at regular intervals before a political event, Intrade odds change constantly as traders hunt for every last scrap of information in the 24-hour news cycle that could sway public opinion before an election. This year the market correctly forecast that Newt Gingrich would win the South Carolina primary and that Romney would win New Hampshire, Florida, Nevada and Maine. It wrongly predicted that Romney would best Santorum in Iowa and Colorado.
Intrade’s status as an oracle among political pros is enhanced because its investors vote with their wallets, not their personal biases.
“It’s a mental contest,” says Intrader Andrew Golding. “You’re taking your knowledge against somebody else’s and destroying them and taking their money.”
The 10,000 or so Intraders --- mostly male and many of them poker players --- place bets on hundreds of real-world events framed as yes or no propositions. Their cumulative wagers are reflected in the share price. When the outcome of a particular event is known, Intrade closes out the market. If they guess right, investors get $10 per share. If they don’t, zero.
For example, if someone bought shares for $6 each predicting Santorum would win the Minnesota Republican caucus, that investor would have walked away with a $4-per-share profit. On Feb. 22, Obama’s chances of winning a second term were trading at $5.95 per share, or 59.5 percent.
Some Intraders are a unique breed of political junkie. Golding, a 34-year-old New Yorker who works in television marketing and has played the Intrade market for four years, says he has never voted, knows next to nothing about the candidates’ records, and professes indifference toward the issues.
Even so, he tracks 500 politics-related Twitter users and opens text messages from Public Policy Polling every time a new opinion survey comes out, updating his Intrades at all hours --- even on a recent vacation in Puerto Rico.
During a Republican debate two days before the Jan. 21 South Carolina primary, Gingrich railed at CNN’s John King for asking a question about his ex-wife’s claims that he had asked for an open marriage --- and got a standing ovation.
Golding says he got a feeling Gingrich shares would “pop” and immediately bought 39 of them for the South Carolina contest at $3.85 apiece. The next day, as pundits applauded Gingrich’s performance, Golding bought 342 more shares for $6.40 each. On Jan. 21, Gingrich won the primary, and Golding pocketed $1,471.05.
Adam Ehrlich, a former options trader in Philadelphia, relied on a hunch the night of the Jan. 3 Iowa caucuses, when Romney and Santorum kept trading places in the lead spot.
At 2:30 a.m., the Republican Party of Iowa finally declared Romney the winner by eight votes. Ehrlich figured the odds of a clerical error were 25 percent to 30 percent.
“Any answer you’re going to get at 2:30 a.m. is more out of necessity than out of accurate results,” he says.
At 2:45 a.m., Ehrlich picked up 1,500 Santorum shares at the rock-bottom price of 4¢, thinking he had a good shot at pocketing $14,940. Although Ehrlich ended up being right, there was no payday. By the time Iowa declared Santorum the winner two weeks later, Intrade had already settled the contest based on its original terms that three major news organizations call the race.
Carl Wolfenden, the company’s operations manager, says not all trades are rational.
“What’s amazing is the sort of eternal optimism of Ron Paul supporters,” he says.
Some traders say they like to bet against Paul, a U.S. lawmaker from Texas. They say he has little chance of becoming president, yet he has such a loyal following of supporters who buy his contracts that it’s easy to make money off them.
Event-prediction markets are legal in Ireland, where the exchange is headquartered. In the U.S., online gambling is restricted, and American banks don’t process credit-card transactions for Intrade, so its users mail checks to the company in Ireland.
“We operate legally” within all European Union business laws, says Wolfenden.
For all its clout, Intrade is a fairly low-budget operation. It doesn’t take fees on trades. Instead, traders pay $4.99 a month for membership. They have to deposit at least $25 with Intrade to use the exchange and keep enough money on hand for all outstanding shares until contests are settled. Wolfenden says that in late 2008 some Intraders had more than $1 million in their trading accounts; this year a handful are already at $300,000.
Intraders boast about their insights, although not their earnings. Golding will only say he moved from a studio apartment to a one-bedroom in a downtown Manhattan building with a doorman thanks to his Intrade winnings, which he says are good enough for him to keep at it.
“I have no idea about the pipelines, the moon landings, immigration, or any of that stuff, and I have no interest,” he says. “Politics isn’t my thing. Intrade is my thing.”
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