Thursday, September 4, 2008

About that Sinking Stock Market...Intrade Reports $100 million in trades while Wall Street Suffers

In a recent article on the predictive power of markets, the Financial Times buried the lede: Political traders at Intrade have invested more than $100 million in political stocks this election cycle, a six-fold increase over 2004! With a slick new site and more press coverage than ever, Intrade will continue to pad that number nicely over the final two months of the campaign.

With the Dow down nearly 350 points this afternoon, and with analysts like Henry Blodget predicting there may be a lot more pain to bear, prediction markets are poised to fill the void. Even as the CFTC is still deciding if and how to regulate political prediction markets like Intrade, some traders getting socked in the stock market have been diversifying their traditional portfolios with political futures.

One particularly bullish investor sees a very bright future in political futures. While acknowledging that such markets are still plagued by liquidity issues and other problems, he notes that "if a major exchange such as CME Group were willing to create a news event market and did it at their current standard it could become a trillion dollar (in outstanding notional value) market in months."

So, while traditional traders cling to the silver lining cited by Blodget after today's crash that "the farther stocks drop, the better the return long-term investors will be," and that "if the Dow drops another thousand points or so, investors might even be able to look forward to a 10-year return that exceeds that of cash" -- political investors are finding an unconventional way to stay afloat in the current trading environment.

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