An Intro to Intrade; Written by 64Push

Intrade is pretty much the leading prediction market on the internet. By prediction market I mean that basically users are predicting whether or not events will happen on a scale of probabilities: from 0% to 100%. You can bet on politics, weather, reality shows, the Oscars, potential wars, CEOs being fired, companies going bankrupt (GM is 63% likely to go bankrupt this year) among many, many, other things (but no sports, for that, there's Betfair.com). Intrade provides useful estimates of the probability of real events occurring. The reason why the estimates are fairly accurate is because money is on the line. If, for example, somebody is putting up money saying that for example John McCain is going to win the election with probability 55%, this bet will surely be taken by somebody who realized that Obama was way ahead. This will force the price/probability down to the true value. I'll explain in greater detail:

Contracts

People are trading contracts on this site. Let's look at our example from before. Suppose Alice wants to wager 5 contracts that McCain will win the election with probability 55%. Contracts are valued at 1/10th of the probability - so she's saying that she wants to pay 55/10 =$5.50 per contract. Contracts will expire at either 100% or 0% once the event takes place (in this case, when election results come in).This means that each contract will either be worth $10 if McCain wins, or 0$ if Obama wins. So if McCain wins, Alice would earn $10 - (amount paid) = $10 - $5.50 = $4.50 per contract. And if McCain loses, her contracts are worthless, they expire at $0, and she lost the $5.50 per contract that she bought them for. Now we understand the bet Alice was trying to make: She wanted to wager 5x$5.50 = $27.5 on McCain to potentially win 5x ($10-$5.50) = $22.50 in profits.

Exchange Based Trading

Intrade is an exchange based site - it sets up a marketplace where people are able to place and take bets. Nobody on the site is betting against Intrade, people are being paired up and are betting against other users. In the above example, Alice would post a bid for 5contracts of McCain at 55% a piece. She now needs to wait for somebody else, say Bob, to take her offer to fill the other side of the contract. That is, Bob needs to see her bid, and accept the bet by putting up the other side (100% - 55% = 45%, or $4.50 per contract).So Bob is actually betting on McCain to lose. He would get Alice's$27.5 if McCain lost, and he would lose his $22.50 if McCain wins (which is then paid to Alice).

Instead of posting a price that you want, you can take prices that are currently offered by other people. But somebody has to be the first to offer a price for a contract. People can even sell a contract without already owning one, which works as follows. Say Charlie sees Alice's bid, but I want her to pay a bit more. Charlie can then post an ask, or an offer to sell, McCain contracts at say 60%. Since Charlie is selling the contract, the price he's putting it up at is the price that the buyer would pay. Say Charlie puts up an ask of 5 McCain contracts at 60%. This means he wants somebody to pay 5x60% = 5x$6 =$30 for McCain to win, and he will put up the other side: 5x40% = 5x$4= $20. So Charlie wants to wager $20 against McCain, to potentially win $30. Note that this is a worse deal for Alice than she wanted to get earlier.

Long vs. Short

Taking a position where you want something to happen, like Alice, is called going long. Taking a position where you are betting against something happening, like the Bob or Charlie, is called going short. These terms are also used in the stock market, and refer to basically the same thing. If you are going long, you are betting that a contract will expire at 100%, whereas if you are going short, you are betting it will expire at 0%.

Markets

A market is simply a collection of contracts that are all expired together. In our election market, we would have a contract for McCain winning, another for Obama winning, another for Ron Paul winning, and so on. It may also contain a contract for the field winning, meaning anyone without a specific contract. Typically one contract per market will expire at 100%, and all others expire at 0%. In the election market this makes sense, because only one person will win presidency, and all others lose.

Here's a picture of the American Idol Elimination Market for Apr 01.

Let's see what we have here. Notice the different contracts for each of the contestants. The Bid column shows the current best price that people are willing to pay for one of those contracts, and the B Qty says the number of units available at that price. For example, somebody wants to bet on Joy being eliminated, and wants to pay 65% or $6.50 per contract, and wants to buy 9 contracts. The Ask column is the current best price that someone is willing to sell at. So for the Joy contract, somebody is willing to sell 2 of those contracts at 79.8%. Last is just the last price matched, Vol the total number of those contracts matched, and Chge is the change in price over the last two contracts traded. You can click on any contract to see the whole list of current offers and bids, and not just the best ones (you might be interested in buying more than 2 Joy contracts, for example). You can also see a graph of how the prices have been fluctuating over the past 7 days (or 500 trades, whatever's smallest).

A Note on Going Short

Note that by going short you can actually win in multiple ways. In the example above, Bob wants McCain to lose, so he could win his bet if Obama wins, or even if Ron Paul wins. Consider the American Idol Elimination Market. You can see that if you short a particular contestant, there are many different ways you can win (any one of the other contestants getting eliminated). Thus when you are going short in markets where there are many potential winning contracts you will normally not be getting as good of odds. This is because you are betting that a contract will expire at 0, which will happen to all but one contract in a given market. But if you short 2 different contestants, then you are guaranteed that at least one of your bets are winning, because at most one of the 2 people you shorted can be eliminated (at most one of the 2 contracts can expire at 100%).

Fees

I don't really want to go into fees, there are a lot of subtle rules, and really I don't like the fee format. Basically, you pay $0.05 per contract traded. It's considerably more complicated than that, but its boring stuff that I'm sure nobody cares about, so just trust me on the fee calculations. If anyone is curious, let me know and I'll fill this section in properly.