December 26th, 2011
09:10 PM ET
3 years ago

Place your bets: Company proposes options market for elections

(CNN) - As soon as next week, a new market may open, where anyone can place bets on the outcome of upcoming political contests.

A small trading exchange in Chicago, the North American Derivatives Exchange (Nadex), has asked federal regulators for permission to sell options tied to the results of various 2012 elections - including the U.S. presidency, control of the Senate, and control of the House of Representatives.

Here's how it would work: Let's say today you bought an option on Former Massachusetts Gov. Mitt Romney winning the presidency for $45. If he won, you would get $100, meaning a profit of $55. If he lost, you would get nothing.

You could also buy and sell the options before the contest is over. For example, you could buy a Ron Paul option today at $10, and if his options started trading higher - say at $15 - you could decide to sell, and pocket your $5 profit.

A limited market already exists, called the Iowa Electronic Markets, which is run by the University of Iowa's business school for academic purposes. The betting is capped at $500, and anyone can play. The market's organizers say the exchange has been a better predictor than most polls.

The University of Iowa's market for the Iowa caucus next Tuesday currently shows Republican presidential candidate Paul climbing to around 84 cents and Romney up at 82 cents, while Newt Gingrich has fallen to 24 cents. The rest of the pack trails at prices below 5 cents.

For the overall GOP nomination, the Iowa market currently shows Romney at about 75 cents, while Gingrich has fallen back below 10 cents with the rest of the group.

The proposed Nadex market would differ from the University of Iowa's market in that it would have a $100 minimum, no $500 maximum, a fee of 90 cents per transaction, and it would be subject to federal regulation.

But first, the idea would have to win approval from the Commodity Futures Trading Commission, or CFTC.

Bart Chilton, one of the five CFTC commissioners, calls the proposal "political poker," and told CNN he plans to oppose it. He cautioned that, just as poll standings can influence public opinion before people vote, the well-publicized ups and downs of such a market could impact the electorate.

"I'm not sure that we want to throw our political process into the trading pits, where just a few well-heeled speculators could theoretically wager on the outcome of an election," he said.

He also said the idea could trivialize the existing futures markets. "That's a slippery slope," he said.

But Timothy McDermott, the general counsel at Nadex, defended the concept as providing a useful financial tool, similar to the existing futures markets, where a farmer can buy a hedge against crop prices going down, and an airline can buy a hedge in case fuel prices go up.

"Whether you're talking tax policy, or health care costs, or energy policy, elections matter, and can have a really significant economic impact on people," he said. "We think that these types of contracts fit squarely within the traditional functions performed by futures exchanges, which is to provide people an opportunity for hedging their risks."

McDermott argued that such trading already exists, on an exchange in Ireland called Intrade. On that exchange, you can also buy or sell options predicting whether "The Artist" will win the Academy Award for Best Picture, or whether Israel will strike Iran before the end of the year.

The recent Dodd-Frank financial regulations passed by Congress expressly forbid U.S. futures based on war, terrorism, or unlawful activity, McDermott said, but not futures based on elections.

"The spirit of the Dodd-Frank law, in general, was to move markets from unregulated spaces to regulated exchanges, and that's exactly what we're trying to do," he said.

Nadex insists that trading futures based on elections should not be considered gambling. But Larry Sabato, a political scientist at the University of Virginia, disagrees.

"It is gambling, of a sort," he said. "But then, most things connected to the stock market and connected markets seem like gambling to me."

Sabato's advice, as a longtime election watcher: "Don't base election predictions on a single variable - whether it's this, or the Gallup poll, or anything else."

–CNN's Lisa Sylvester contributed to this report.


Filed under: Elections
soundoff (33 Responses)
  1. Tony in Maine

    The futures market is gambling – unfortunately it attracts very big players who can effect market price right up to maturity. Commodities futures under deregulation can control the price at maturity – so how long before the Koch's begin to manipulate elections to make a quick billion or two strictly on the futures aspect.

    And the whole thing is complex enough that the steno pool that currently makes up the 4th Estate could never understand it themselves let alone explain to Joe the Plumber how he is being screwed by his heros.

    December 26, 2011 09:16 pm at 9:16 pm |
  2. cali girl

    I am calling my book right now. Double or nothing on my boy Obama. The odds are in my favor considering the choices.

    December 26, 2011 09:23 pm at 9:23 pm |
  3. Larry L

    I suppose we will have reached the bottom if this becomes a reality. Super PACs will have even more motivation to impact an outcome and smear campaigns will be balanced against the "line". Sadly, many Americans seem to consider politics a game where people take sides and boo the opposition. We need to grow up and think about the sort of leadership we actually want rather than allowing talk show hosts and hate radio programs to define our viewpoint.

    December 26, 2011 09:30 pm at 9:30 pm |
  4. GI Joe

    I thought we already had that on Wall Street and in Vegas. Guess this one will bring in more election-fixing for the republicans - maybe we can bet on how the Supreme Court will do the next time they have to select a President.

    December 26, 2011 09:34 pm at 9:34 pm |
  5. jack johnson

    He's worried about wagering changing the out come, WHAT ABOUT BIG BUSINESS BUYING THE ELECTIONS? Oil, Koch, and Norquest

    December 26, 2011 09:41 pm at 9:41 pm |
  6. stevetall

    A class-A moronic idea. The whole thing is fixed anyway, so who do these pinheads think they are? Haven't they screwed up the marketplace beyond all recognition already? Get the tar and feathers!

    December 26, 2011 09:53 pm at 9:53 pm |
  7. Anonymous

    This is a bad idea. It doesn't surprise me that a financial trading company would come up with this. This is just the next step to bring down America. Now, we can sell off our political elections by the hands of greedy traders. God have mercy on us. Tell it like it is. It is Gambling! i hope our Federal Regulators don't sell us out. For once, make a right decision. Do the right think. This will open up pandora's box. It will be the step to communism. Don't do it!

    December 26, 2011 09:56 pm at 9:56 pm |
  8. Noodle Nose Johnson

    I'm gonna short sell on Paul. Will make a fortune from his nutty followers after he crashes and burns, sometime shortly after South Carolina.

    December 26, 2011 10:13 pm at 10:13 pm |
  9. Springwolf

    How is this any different than placing a bet in Vegas. Seems like another underhanded way for someone to get around gambling laws. And what's in it for the controller of these 'bets'. Some how there seems to be more to this story that we're not hearing and it's simply another way for corporations to make more money on the backs of the American people. Isn't anything sacred anymore?

    December 26, 2011 10:20 pm at 10:20 pm |
  10. Gregg

    another crappy idea only we dimwitted Americans could come up with.

    December 26, 2011 10:42 pm at 10:42 pm |
  11. J.V.Hodgson

    ridiculous, outrageous, that anyone can profit from betting on political elections automatically introduces a bias in certain people.... especially those who like to be winners... what they forget is that they are betting based on uncertainties of policy.... not all election pledges become law or how the country is run.
    Application dismissed!!
    Regards,
    Hodgson.

    December 26, 2011 10:50 pm at 10:50 pm |
  12. Ingyandbert

    What will these idiots dream up next?

    December 26, 2011 10:54 pm at 10:54 pm |
  13. Mike C

    What could possibly go wrong?

    December 26, 2011 10:58 pm at 10:58 pm |
  14. Mr. Do

    Yeah more money in politics, just what we need! :-(

    December 26, 2011 11:08 pm at 11:08 pm |
  15. sidneyhop

    And if more there are more sellers than buyers, dont worry!!! The middle class tax payers will just bail them out! WIN!!!

    December 26, 2011 11:32 pm at 11:32 pm |
  16. john

    Are you kidding me?? This form of gambling should not be tolerated in any way. I find it bad enough that so called news sites like CNN and FoXNEWS actually make predictions every day on how they think the stock market will do... would you believe?? Most are true. Vegas gambling for daytraders.. ALL WRONG

    December 26, 2011 11:51 pm at 11:51 pm |
  17. DG

    What a horrible idea.

    December 27, 2011 12:17 am at 12:17 am |
  18. Nick

    Come on all you right wingers! Don't let Federal regulation and big government get in the way of the free market.
    "He cautioned that, just as poll standings can influence public opinion before people vote, the well-publicized ups and downs of such a market could impact the electorate." – Sounds like a bunch of liberal hogwash telling us that we're too stupid to understnad such things as the free market of ideas.
    THese guys are regulating us to DEATH. even trying to get in the way of what is probably one of the most sensible investment vehicles every created. Right up there with CDOs and CDSs.
    Down with regulation!

    December 27, 2011 12:21 am at 12:21 am |
  19. L. D. in Denver

    Intrade was extremely accurate in past elections. Pay attention to them, folks!

    December 27, 2011 12:37 am at 12:37 am |
  20. Kempo

    >implying Ron Paul won't be president

    December 27, 2011 12:38 am at 12:38 am |
  21. Mike

    sounds like just another 1% scheme to me. This is the kind of thing destroying the economy.

    December 27, 2011 01:03 am at 1:03 am |
  22. Georgia Girl

    OMG. Seriously! Our lives have become a betting game in politics. Please America wake up and stop the partisan biggering and focus on making us great again. Remember... a house divided is a house that will that will fail. Democrats and Republicans are all Americans and the rest of the world is waiting for us tor us to sel emplode.

    December 27, 2011 01:08 am at 1:08 am |
  23. Republicans are just a bunch of liers

    Obama wins against these Koch puppets...I cannot believe ppl would vote to go back to the same crap we just got out of....sad...so sad....

    December 27, 2011 01:16 am at 1:16 am |
  24. reason

    You could accomplish the same with buying puts or calls on the S&P 500. If Obama wins, the market tanks. If anyone but Obama wins, the market gains.

    December 27, 2011 01:17 am at 1:17 am |
  25. bobden

    Buying stock is not investing your money. It would be more like an investment if you could not sell the stock for at least 2 years. Buying stock onw day and selling it the next day is not investing. It is GAMBLING.
    We need to call things by their right name.

    December 27, 2011 01:36 am at 1:36 am |
1 2