December 26th, 2011
09:10 PM ET
11 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. wow

    Wow...incredible...oil futures are enough

    December 27, 2011 02:06 am at 2:06 am |
  2. steve harnack

    That is just wrong on so many levels that it makes me sick to my stomach.

    December 27, 2011 02:22 am at 2:22 am |
  3. Debra From Georgia

    Well, I do not have $50.00 but I bet a cold ice beer on a hot summer evening for Mr. Barrack H. Obama. The Current President of the United States. He killed Bin Laden, He brought down Kaddaffy, He ended the war in IRAQ. He gave us universal health care, and yes the stimulus plan worked. It created 3.5 million jobs. If it was not for that do nothing congress it would have created more jobs. That do nothing congress said no to the job bill, no to tax cuts for the middle class, no to the growth of our economy. I put my bet on Mr. Obama.

    December 27, 2011 04:42 am at 4:42 am |
  4. HenryB

    What have we come to? Is this the capitalism we so desperately want? We really are past our prime and it isn't because of our President who seems to get all the blame. It is our culture of "freedom".

    December 27, 2011 06:54 am at 6:54 am |
  5. KatR

    This is a nutty idea. Gambling in the stock market threw millions of Americans out of a job. Now they suggest gambling on the outcome of elections? Crazy.

    December 27, 2011 07:41 am at 7:41 am |
  6. Anonymous

    Thanks to centuries of behind the scenes corruption by America's hidden elites, they have already monetized our political system. This will just make it more obvious.

    December 27, 2011 07:53 am at 7:53 am |
  7. GonzoinHouston

    What does this tell you about what derivatives have done to the securities industry? If we're going to do something like this, do it out of Las Vegas, not a securities exchange.

    December 27, 2011 08:04 am at 8:04 am |
  8. diridi

    Just vote for Obama2012. GOP idiots further mess. Frustrating and shipping jobs overseas. Cut tax on wealthy and ditch this nation even deep; Obama2012.

    December 27, 2011 08:04 am at 8:04 am |
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