On Feb. 15, Mitt Romney’s campaign held a conference call with political reporters to discuss the candidate’s prospects in the upcoming Michigan primary. Rick Santorum, who had just won contests in Colorado, Minnesota, and Missouri, was leading by as much as 15 percent in state polls. So how did Romney’s advisers reassure the media he was still the GOP 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.
Launched 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 churned out in the 24-hour news cycle that could sway public opinion leading up to 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-odd Intraders—mostly male and many of them poker players—place their bets on hundreds of real-world events framed as yes or no propositions. Their cumulative bets 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, the President’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 GOP debate two days before the 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 entirely rational. “What’s amazing is the sort of eternal optimism of Ron Paul supporters,” he says. For others, that’s an opportunity for the perfect short. “Betting against Ron Paul is not something that requires a lot of brain power,” says Josh, an LSAT tutor in Tuscon who declines to give his last name out of concern over Intrade’s legality. “His fans … buy his contracts again and again, to a level not supported by any kind of empirical evidence. So you can just take money from them.”
Event prediction markets are legal in Ireland, where the exchange is headquartered. In the U.S., online gambling is heavily 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 from all [European Union] business laws,” says Wolfenden.
For all its clout, Intrade is a fairly low-budget operation. It doesn’t take any fees on the 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 in late 2008, some Intraders had more than $1 million in their trading accounts; this year a handful are already at $300,000.
Intraders brag about their insights, but not their earnings. Golding will say only that he moved from a studio apartment to a one-bedroom in a downtown Manhattan building with a doorman thanks to his Intrade winnings, which 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.”