During the final days of the 2012 election season, Intrade's message boards were abuzz about an anonymous trader who came to be known as the "Romney Whale." His motives were mysterious, but his movements were unmistakable, making huge waves through the market. In the two weeks before the election, even as the polls moved in Obama's favor, the Whale added $3.8 million to his already enormous bet on the Republican.

Sitting in his office at Barnard College, economist Rajiv Sethi was intrigued. According to the efficient markets hypothesis, the price of a Romney contract should have reflected the reality of the race, which seemed to be heading toward a comfortable Obama victory. Nate Silver's operation for the New York Times, for instance, was putting the president's chances at better than 90%. But Obama's Intrade price was holding steady at 70. When Sethi looked closer at the order book that listed all the contracts up for sale, he saw the many thousands of bets offered by the Whale effectively propping up the market.

Sethi thought there had to be a hidden agenda behind the Whale's seemingly irrational position. But what was it? The Whale never revealed his identity, disappearing from Intrade as soon as the last polls closed. The market immediately corrected, predicting the final outcome in all but one state: Florida. In total, the Whale lost nearly $7 million. "In the end the fog clears and reality asserts itself," Sethi wrote on his blog. "Or so one hopes."

The fog that obscured Intrade's shaky finances began to dissipate immediately after the election. First, the CFTC brought its lawsuit to federal court in Washington, specifically citing Intrade's decision to go back to offering (comparatively tiny) markets on financial predictions like the future unemployment rate. The evangelists of quantification responded with predictable outrage. "Out of all things the CFTC could be doing to protect consumers and investors," Nate Silver tweeted, "it chooses to sue Intrade?!?"

Shortly afterward, though, in March 2013, Intrade announced that it was suspending operations, and the less innocent truth began to emerge. Ron Bernstein disclosed a cash shortfall affecting customer accounts. The company managed to avoid insolvency by obtaining a forbearance from customers while it attempted to recover the funds allegedly diverted by John Delaney. In a series of audits publicly filed in Ireland, Intrade disclosed that some $4.2 million was missing from its accounts and those of a related company, and the company sued Delaney's widow, Orla, in the Irish courts.

As Intrade's business imploded, Sethi and David Rothschild, his colleague at Microsoft Research, continued to investigate the market's anomalous behavior during the closing days of the 2012 elections. The Romney Whale's actions raised a troubling question: How did Intrade actually settle on its prices? Economists sometimes say they know how markets work in practice, but not in theory. According to the prevailing model, the microstructure of the market is broken up between smart traders, who wager based on good information, and lots of little "noise traders," who decide based on transitory factors like momentum.

But that couldn't explain the actions of the Whale, who seemed to be taking a manifestly dumb position. Was he a Romney true believer? Some exotic arbitrageur? Sethi and Rothschild eventually settled on the tentative hypothesis that the trader was a manipulator, trying to sustain Republican hopes — and turnout — at a time when all signs pointed to a demoralizing loss. They could only guess, however, as to whether the motives of the strategy were political or financial. "If there is an opportunity there," Sethi tells me, "it raises the question of how seriously we should take Intrade's prices."

When Sethi and Rothschild got a look at all the transactions on Intrade over the final two weeks of the 2012 campaign, what they found didn't look much like the economists' clockwork model of the marketplace. Intrade's contracts could be closed any time, allowing traders to take incremental profits — for instance, buying Romney after his "47%" comments leaked and selling after his victory in the first debate — as prices shifted.

It turned out that few traders followed this strategy. Only 6% of account holders showed a willingness to take either side of the wager. They weren't willing to bet, however profitably, on a candidate they didn't like. This was true even of the big fish: The market's seven largest traders, including the Whale, all bet almost exclusively on one candidate. Inside, it turned out that Intrade didn't look like a dispassionate machine. It appeared to function a lot like our messy, irrational, uncompromising political system.

Maybe that was the flaw in the theory — the uncontrolled variable of belief. But we'll probably never know. Since the demise of Intrade, many prediction market proponents have come to the reluctant conclusion that their experiment is finished. However promising the idea of measuring political futures through real prices might be, it's not likely to be put into large-scale practice again, given the CFTC's intransigent interpretation of the law. "As an economist," Koleman Strumpf says, "it's hard for me to understand."

Over the years, many prediction market pioneers have given up on the notion of trying to sell their ideas to the general public and skeptical legal authorities. Some, like Servan-Schreiber, have turned to applying the technology within big corporations, allowing employees to, say, bet on the success of products in development for play-money stakes. Research he and Wolfers conducted indicates that prediction markets function even without the promise of financial gain. Wolfers lost a bet on that, and had to buy his French colleague a bottle of Australian wine. "The problem with real-money markets," Wolfers acknowledges now, "is that some people are dumb but rich."

Many other academics, including Wolfers and Robin Hanson, are involved in projects that cater to another clientele: the intelligence community. Recently, Intelligence Advanced Research Projects Activity, IARPA, the Directorate of National Intelligence's research wing, sponsored an academic competition meant to "dramatically enhance the accuracy, precision, and timeliness of forecasts." Teams with names like the Good Judgement Project developed prototype markets for world events, eliciting predictions from a wide range of volunteers. (No money was at stake.) Hanson, who heads an IARPA-funded project called SciCast, said spies could derive an obvious benefit from trading on their collective knowledge through exchanges.

"The mechanisms we already have are plenty good enough to help them," Hanson said. "It's just hard for them socially to actually use them."

Ron Bernstein, meanwhile, is still struggling to prove that Intrade itself has a future. While the company is still fighting the CFTC's lawsuit, late last year it came to an undisclosed financial settlement with Orla Delaney. Bernstein now talks of "turning the corner from defense to offense." He has moved the company's headquarters back to New Jersey, where he lives, and is currently hiring staff to a relaunch a sports betting site, Tradesports.com, in a sense returning to the company's original business plan. The Tradesports website touts a "new and LEGAL way to play fantasy sports," structured around close-ended contests that award prize money. Bernstein says he plans to be up and running in time for college basketball's March Madness.

As for the political markets that made Intrade famous, Bernstein still believes there's a use for the trading platform technology, but he says the company is done with exploring gray areas. "Prediction markets in the United States for real money are not legal," he says, emphatically. On a recent appearance Bernstein made on the Fox Business Channel, host John Stossel brought up Predictious, a new Irish-based marketplace that denominates trades in Bitcoin. "We've learned from our own experience," Bernstein replied, "that regulatory avoidance isn't a good business model."

A few of the most voracious Intraders have moved on to playing Predictious or one of the handful of competing offshore exchanges. But most now consider themselves retired from politics. Laurence Lau has struck up friendships with some of his former competitors, such as Joe Schilling. "We really operated behind the veil of secrecy," Schilling says, "but now I'm Twitter buddies with these guys."

There has been a lot of gossip about Intrade's corporate intrigue, and half-serious talk of a reunion, or a hedge fund. The traders have also watched with bemusement as Nate Silver has successfully marketed his algorithmic approach to all of life's compelling pursuits: politics, sports, the weather, even dating and sex, moving his operation from the New York Times Company to Disney, the parent company of ABC and ESPN.

"The thing about Nate Silver is, there are a million other guys just like him," Lau says. "As information becomes more readily available, it becomes harder to find that edge." If Intrade was flawed, he and other traders argue, it wasn't that there were too many dumb whales in the marketplace; it was because there were too many people betting exactly the way that Silver and his statistically minded acolytes told them to. When even the rubes are playing Moneyball, it gets hard to make a buck.

"God bless Nate Silver," Schilling says, "but he kind of ruined Intrade for a lot of us."