I have to think that, cool as it looks, the folks at Intrade are in way over their head in the futures markets. They currently have trading in daily closing price futures for indexes like the S&P 500. Though they bill their service as "prediction markets," in fact, they aren't totally. Instead, they are acting as a new financial futures market. I cannot imagine that the market there is sophisticated enough or liquid enough to be efficient yet. Some aspiring young trader type, or even just a good script programmer with some finance theory under their belt, could clean house, I suspect, by taking advantage of the exchange (owned by what is effectively a sports betting company) and the naiveté of its traders. One could easily arbitrage their entire S&P contract set against CME's E-Mini S&P 500 futures.
Just looking at the market briefly today I spotted a quick arb play between the "S&P 500 to close DOWN by 2.5 points or more at 1pm EST" and "S&P 500 to close DOWN by 5 points or more at 1pm EST" futures pricing. There looks to be about $750,000 at risk in Intrade's top 5 contracts. Pulling even a 2% per day return would be a nice catch.
I'm not sure what Intrade thinks they are adding to the equation. These kinds of futures in exchange indexes are already VERY well covered and the people who play with them at the smaller capital levels Intrade is permitting are unlikely to have the needed sophistication to compete with the real sharks in the futures world.
Then again, it is interesting to see that the "market" thinks there's an 18.5% chance that "Abu Musab al-Zarqawi to be captured/neutralised by 31 Dec 2006" will pay off. (The British spelling is ubersexy enough to make even a hardened finance girl moist too). Still, they don't seem to be capitalizing on the real opportunities in prediction markets that the DoD bungled. Where's the "major terrorist event by January 2007" contract, for example?
Well, even if the DoD missed the boat, there are a series of these upstarts. Perhaps someone will get serious about them eventually. As with any new market, the early period of inefficency is a huge opportunity for a seasoned player.