Interactive Brokers is launching a new service that will allow its customers to speculate on the outcome of macroeconomic events through a new platform called ForecastEx.
What is ForecastEx?
ForecastEx is a new prediction market and exchange being launched by Interactive Brokers that will allow users to take yes-or-no positions on various economic and climate indicators.
How does ForecastEx work?
ForecastEx users will be able to buy “yes” or “no” contracts based on stated outcomes for specific indicators.
Contracts on ForecastEx are priced in a range between 2 cents to 99 cents, when the event that’s being traded concludes, the winning contract is worth $1.00.
While the incorrect one immediately becomes worthless. A winner-take-all scenario.
That pricing model might sound familiar to some readers, who may recall the binary options market, that sprung up 15 years ago in London, and which became popular among margin trading brokers and their clients.
However, the binary options market was quickly overtaken by scammers and fraudsters, to the extent that European and UK regulators, issued an outright ban on the products, for retail investors, in late March 2018.
What types of indicators will be available on ForecastEx?
Initially, ForecastEx will offer contracts on economic and climate indicators such as the Federal Reserve’s target interest rate, U.S. consumer sentiment, national debt, retail sales, and levels of carbon dioxide in the atmosphere.
Interactive Brokers’ existing US customers can access ForecastEx through the IBKR ForecastTrader platform using their current credentials.
The ForecastEX exchange will also be open to clients of other US futures commission merchants, or brokers, and trades on the exchange will processed and settled by a dedicated clearing house.
Interactive Brokers won’t charge commission fees on event contracts as their exchange acts as the market maker /counterparty to the trade and not as an agent.
What makes ForecastEx different from other prediction markets?
Interactive Brokers plans to act as a market maker, taking the opposite side of customers’ trades to provide liquidity at launch.
They also plan to expand the offerings to global indicators and other topics in the future.
Some other prediction and betting markets have previously operated on a peer-to-peer basis
Thomas Peterffy, the founder and chairman of Interactive Brokers, believes prediction markets will be highly impactful in shaping society’s response to crucial questions, and establishing a consensus on controversial issues.
Can ForecastEx be used for hedging purposes?
Interactive Brokers believes that these contracts could potentially be used to hedge against economic and weather-related events.
However, event contracts/outcome markets are not new.
But, interest in them has been revived and has grown rapidly since the pandemic.
According to the Wall Street Journal, more prediction contracts were listed for trading in 2021 than in the previous 15 years combined.
Are there any risks associated with using ForecastEx?
Yes outcome markets are risky because the result is binary, that is the client either wins or loses, and if the latter, then the difference between the entry and closing prices is forfeited.
For example, if you buy contracts on an event at 80 cents, but the final make-up is zero, you lose the full 80 cents, times the number of contracts you had open on that event.
ForecastEx has received the necessary approvals from the Commodity Futures Trading Commission to operate as a designated contract market.
ForecastEx expects to be operational from July 8th.
David Downey, CEO of ForecastEx said:
“We are excited to launch our exchange, which we believe will be exceptionally customer-friendly, and proud to introduce a new model of derivatives exchange,”
How does ForecastEx compare to other similar offerings?
ForecastEx is unusual in being a dedicated and regulated exchange for prediction markets, However, it’s not alone, because the giant CME Group offers event markets and products that are tied to the closing prices of various future contracts.
The ability to speculate on political and economic events is no bad thing in itself.
However, the outcome in the widest sense very much depends on the business model adopted and its application.
Binary options were an interesting product, but they were open to abuse. And even without that abuse, it would have been hard for even legitimate margin trading firms, to justify their existence and win-loss ratios to the regulator, from a treating customers fairly perspective, whilst the broker was taking the other side of every client trade.
Interactive Brokers’ approach is somewhat different because they have established a regulated exchange to facilitate trade in event markets.
The underlying levels of demand for these contracts remain an unknown quantity, are they a novelty? Or something retail traders will get behind?
One indicator of success for ForecastEX will be in the number of other brokers who offer trading on the exchange to their clients because that’s what will be needed to create genuine liquidity, and for the market to scale.
Right now it looks like an interesting experiment, and I wonder what price are you making in ForecastEx success.
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