12.20.2011

Buy Side Offered Unique Derivatives

12.20.2011
Terry Flanagan

One exchange goes the extra mile to provide the buy-side contracts on the 2012 presidential election.

Buy-side traders, some who favor making speculative bets on the most esoteric of derivatives, may rejoice. The Chicago-based North American Derivatives Exchange (Nadex) has filed a notice of intent to offer derivatives contracts on the 2012 presidential election, which includes a bet on the outcome, as well as majority party control of the U.S. Senate and U.S. House of Representatives.

As obscure as such offerings may seem, betting on political outcomes have existed in an unregulated environment in the U.S. and overseas for many years, according to an unnamed source.

Yet, as many market participants have been feeling that 2011 marked a year of high volatility, partly due to political and government interference, perhaps more than just speculators are paying attention to politics.

“Elections matter and investors have a huge interest in their outcome as there will undoubtedly be economic consequences,” said Yossi Beinart, chief executive of Nadex. “These contracts also provide a real-time gauge of voter sentiment, which can be more valuable and more accurate than public opinion polls.”

Nadex’s Presidential Election contracts will be listed on all major candidates of any party or independents as of January 1, 2012. The outcome will be determined by the winner of the election announced in Congress in January 2013.

The 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.

Lastly, the 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.

The new contracts will be binary contracts, which are also called “all or nothing” options, and have historically been primarily offered over-the-counter. “Their risk and reward are capped as they range from zero to 100,” said Dan Cook, head of business development for Nadex. “But, they’re shorter term, high gamma types, and have limited risk.”

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