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Intrade didn’t see its own demise coming

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Intrade sheds light on how quickly gray markets can go dark. The site, which took bets on everything from elections to oil prices to its own demise, was abruptly shuttered on Sunday. While Intrade's predictive record was good, it didn't foresee the rising controversy over under-regulated speculation. It's a cautionary tale for others operating in a somewhat shadowed zone.

What halted Intrade isn't clear. The Irish company said it discovered problems, including possible "financial irregularities." Regulators already had come calling. In November, the U.S. Commodity Futures Trading Commission filed a lawsuit that prompted the company to close its site to U.S. punters.

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The pseudo-exchange occupied a niche that overlapped with futures dealing, online gambling and secondary market trading. Eventually, the CFTC decided that predicting the price of gold, for money, was the same as investing in the future price of a commodity, and that Intrade therefore wasn't stopping ineligible U.S. customers from making wagers.

Other similar sorts of markets have met a similar fate. In 2006, U.S. lawmakers cracked down on overseas gambling sites by prohibiting banks and credit card companies from processing related payments. It eradicated big slugs of market value for U.K. companies PartyGaming and 888.com.

Others, like fantasy sports site StarStreet, are still flourishing. The company says its operations are legal because games where competitors create fictional teams using real-life professional athletes are based on skill and therefore exempt from the same 2006 law.

Exchanges like SecondMarket, which allow trading in the equity of private firms including pre-IPO Facebook, have been gradually becoming more accepted. The recently passed JOBS Act simplifies compliance and expands the number of eligible companies. Last week's announcement by Nasdaq that it was forming a joint venture with SharesPost underscores their continuing emergence.

Yet markets in unlisted companies, even big ones like Twitter, provide less disclosure and are far more illiquid than public ones. The collapse of Germany's small-cap Neuer Markt after the dot-com bubble and the shrinkage of London's AIM since 2007 are cases in point. Even Goldman Sachs couldn't attract enough investors to sustain its GSTrUE marketplace. If regulators don't catch up with gray-zone operators, other forces often do.

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