IEM Was Predecessor to Proposed Binary Election Options
The North American Derivatives Exchange (Nadex) today filed a notice of intent to offer for trading "Political Event Contracts" on the 2012 elections for President of the United States as well as majority party control of the U.S. Senate and U.S. House of Representatives. The filing serves to bring federal oversight to popular markets that have existed in an unregulated environment in the US and overseas for many years.
Nadex, a fully-regulated, retail exchange authorized by the Commodity Futures Trading Commission (CFTC) in 2004, offers self-directed market participants smaller-sized binary option trading in a wide-range of markets. Nadex plans to offer Political Event Contracts for trading as early as January 2012.
Political Event Contracts will allow Nadex market participants to take an economic position on the outcome of the most important national election results in 2012. For example, investors concerned about the elections' consequences for future tax policy could buy or sell a contract based on their expectations of outcomes on any or all of the elections for President or majorities in Congress.
Additionally, Political Event Contracts can offer a highly accurate predictive value of election outcomes, as evidenced by more than 15 years of trading on the unregulated Iowa Electronic Markets, an academic research project of the University of Iowa. Similar markets in U.S. election outcomes have also been offered on unregulated offshore trading platforms, but these platforms are not contract markets designated by the CFTC.
"The public will benefit from federal oversight of these markets. Elections matter and investors have a huge interest in their outcome as there will undoubtedly be economic consequences," said Yossi Beinart, CEO and President of Nadex. "Indeed, the public benefits of Political Event Contracts go beyond mere risk management. These contracts also provide a real-time gauge of voter sentiment, which can be more valuable and more accurate than public opinion polls."
The Political Event Contracts are binary options with a settlement value of 0 or $100, which caps the maximum risk or reward. Market participants pay the full price of a contract (margin is not offered). Nadex limits speculative positions in all of its contracts, monitors large positions and clears and settles all trades in a transparent and timely manner. Contracts will be based on the following general criteria (full contract specifications will be posted on Nadex.com):
- Presidential Election: contracts will be listed on all major candidates of any party or independents as of Jan. 1, 2012. The outcome will be determined by the winner of the election announced in Congress in January 2013.
- Majority Control of U.S. Senate: contracts will be offered on Democratic and Republican Party control of the Senate. The outcome will be determined by whether a party holds 51 or more seats on the first day of the new Congress in January 2013.
- Majority Control of U.S. House: contracts will be offered on Democratic and Republican Party control of the House of Representatives. The outcome will be determined by whether a party holds 218 or more seats on the first day of the new Congress in January 2013.