Q: Who is trading political futures instead of FX during Brexit week? A: Nobody!
As the EU referendum approaches, all speculation is on the currency market, however political futures trading is notable by its absence.
This week is most certainly going to be one of the most interesting weeks with regard to currency market volatility across the entire annuls of history.
For the first time since becoming a member of the then-named European Economic Area (EEA), or simply Common Market in 1973, and subsequently a member state of the European Union with no consultation of the British public, a long-awaited referendum is about to be held.
Speculation as to which way Britain’s electorate will vote is now at very high levels, and the public is openly quizzing Prime Minster David Cameron, who is committing his efforts toward ensuring that Britain remains a member of the European Union, with a backdrop of disapproval against him from members of the working public, leading commercial economists and from senior executives in some of Britain’s largest companies.
A tremendous emphasis has been placed on the potential effect that the results of the referendum may have on the currency markets, and FX firms and traders alike are now bracing themselves for the expected fluctuations before and after the referendum has taken place.
Many retail FX companies have adjusted their margin and leverage parameters, in order to avoid exposure to negative client balances and traders are looking at the potential severe appreciation or depreciation of the pound against the euro that may ensue.
The pound is the world’s most valuable sovereign currency, and has never been pegged to the euro, therefore this period is particularly interesting.
What is even more interesting, however, is that retail traders are sticking firmly to trading FX pairs during this period, and are concentrating on what may or may not happen with regard to the outcome of the referendum, however nobody is talking about closing their FX positions and trading political futures at a time during which the futures exchanges of Chicago are holding their hand out to retail traders, and at a time during which the currency markets could be allowed to settle down whilst those wishing to take a fixed contract bet on the outcome of an event as huge as the referendum could do so without risk of exposure to currency market volatility.
What is available?
The Beta edition of OTC binary options firm PredictIt features a high resolution depiction on the home page of its website of former Conservative Mayor of London Boris Johnson, a staunch ‘Brexit’ supporter and Member of Parliament for Uxbridge and South Ruislip facing Prime Minister David Cameron, a vocal opponent of a ‘Brexit’, with PredictIt stating that ‘Traders give Brexit a 34% chance.’
Unlike the binary options brands that have dominated their sector over the last five years and concentrate on fixed currency-based contracts which are often operated via warehouse platforms, PredictIt purely makes its market based on political outcomes.
The company defines itself as a ‘real-money political prediction market, and a stock market for politics which was established to research the way markets can forecast future events, using data sharing from professors from various North American universities.
The interest in this thus far among retail traders at this poignant political juncture pails into absolute insignificance compared to the run of the mill currency trading entities which are offering spot transactions that could be affected by sharp moves this week.
Following the educational and academic research route, IEM, the Iowa Electronic Markets, is a futures market run for research and teaching purposes in which traders can buy and sell real-money contracts based on their belief about the outcome of an election or other similar event such as the forthcoming EU referendum in Britain.
IEM considers the ‘wisdom of crowds’ to be the method for obtaining the price of a contract at any given time as a forecast of the outcome.
Interestingly, whilst dedicated firms which use .edu or .org domain names and are providing a market for the purposes of research by using data provided by academics from universities are, whilst not generating high volumes at all, legitimate, exchange-listed contracts which offer the trading of political event outcomes are forbidden in the United States.
In Britain, where betting and gambling are legal, the prediction of outcomes of political events fall under the remit of firms such as Fred Done, Ladbrokes or William Hill, all of which offer high street shop-based transactions which allow private individuals to ‘bet’ on the potential outcome, however this, on a commercial basis, is illegal in the United States.
On December 19, 2011, binary options exchange NADEX submitted a self-certified request to the Commodity Futures Trading Commission (CFTC) following which it intended to offer new contracts that involved the prediction of a Democratic majority in the US House of Representatives, contracts which involved the prediction of a Republican majority in the US House of Representatives, and similar contracts in which traders could predict a Democratic or Republican majority in the US Senate, as well as 10 US presidency prediction contracts relating to the 2012 US federal election outcomes.
The CFTC wrote to NADEX in April 2012 forbidding these contracts to be made available, citing that offering them as binary options contracts would be contrary to public interest.
Intrade.com, established in 1999 by Ron Bernstein and Sean McNamara, has been another casualty of legislation against offering political outcome speculation to retail traders.
Intrade was later acquired by Tradesports in 2003. John Delaney, the VP of Finance at Intrade, was appointed as the CEO of Tradesports during the acquisition of Intrade by Tradesports.
In 2004, Tradesports was re-organized into Trade Exchange Network Limited (who operated the websites Intrade.com, Tradesports.com, WallStreetSports.com, Prediction-X.com and other websites using the Intrade trading platform and technology). In 2007, Trade Exchange Network Limited was re-organized into three new corporate entities: Intrade the Prediction Market Limited (currently operating Intrade.com) Tradesports Ltd (previously operating Tradesports.com, which closed in 2008) and Prediction Exchange Services Limited, a technology company (which never initiated operations).
Intrade’s system utilizes a prediction market trading exchange which allows members to take positions (trade ‘contracts’) on whether future events will or will not occur. An example event is a political election, which is almost always settled in a well-defined and verifiable manner. The contract might be “Mitt Romney to win 2012 U.S. presidential election”. Other possible events include financial predictions, such as “the NASDAQ Average to close higher today”, or current events predictions such as “Will Adele win the Grammy Award for Best New Artist?” Intrade facilitates trading between members, charging a monthly fee, but does not participate in trading itself.
Trading positions are described in the common trading nomenclature of long (will happen—bullish) and short (will not happen—bearish). The trading unit is a contract with a notional settlement value of $0 if the event does not occur or $10 if the event does occur. The contract may trade in the range of 0–100, where 1 point equals US$0.10 in value.
So, if the event specified in a given contract occurs, the contract settles at 100 points or $10; otherwise, the contract settles at 0 or $0 in value. Profits and losses are calculated by tabulating the differences between where contracts are purchased against where they are either sold (at any price set by the open market between 0 and 100) or what price they finally expire at (0 or 100) when the event itself is concluded. Utilizing this contract structure, the current price of a contract can be imputed as “the market’s” global opinion of the probability that the specified event will occur.
Because events take place over a well-defined time span and have a well defined outcome, traders can trade both before and during an event. Intrade provided both real-money and play-money prediction market trading. The minimum deposit for opening a real money account was US$25.00, but US$100 is recommended to “fully appreciate the trading experience”.
In, March 2013 Intrade suspended all trading, citing possible “financial irregularities” which came about after the company was forced to exclude US customers in 2012 as a result of regulatory disdain for this type of trading environment.
For a time after the suspension, the intrade.com website stated that they were working on a relaunch of the site, called “Intrade 2.0”, but as of August 2014 it states that “It appears very unlikely now that Intrade will resume trading services in the way it had operated previously”, and closed all accounts and refunded monies by December 2014.
This week, the Brexit is at the forefront of the minds of all traders and FX firms globally, however the instrument on which the outcome depends remains currency, and not the actual outcome itself.