September 25, 2012 – Put Your Money Where Your Mouth Is: More Americans may soon be able to openly wager in the markets about whether President Barack Obama wins re-election.
Political junkies have previously placed “bets” on the presidential race through the Iowa Electronic Markets and the Irish exchange Intrade. But the federally regulated market being set up by Chicago-based Nadex has a major difference – they could cash in.
Nadex said it plans to file a request with the Commodity Futures Trading Commission to list contracts on the victor of the 2012 presidential race and the majority parties in the House and Senate.
Introducing these so-called “prediction markets” to the broader public could end up giving a better read of the “horse race” than traditional polls.
“We believe when someone puts his money where his mouth is, it will be more accurate,” said Nadex chief executive Yossi Beinart. “It’s not just a game necessarily.”
Similar prediction markets are already valued tools for political observers. Forecasts from the Electronic Markets in the last week of four presidential elections have proven to be more accurate than the final Gallup polls.
The Nadex contracts would be valued on a scale of 0 to 100, which lets the market determine the percentage likelihood of, say, Obama winning.
If the contract on Obama costs $51—meaning a 51 percent chance of a November 6 triumph for the president—and he cruises to victory, the owner would earn a $49 profit, minus a transaction fee. The person betting against Obama would be out $49. Or, if a Newt Gingrich fan buys shares in the former House speaker at $10 and sells him for $40, he pockets a $30 profit.
The rebirth of political markets was made possible, in part, by the Dodd-Frank financial reform.
By specifically banning contracts tied to terrorism, assassination, war, or any illegal activities, the law provided guidance indicating that speculation on elections was again acceptable.
“We think it’s not just consistent with the letter of the law,” said Nadex general counsel Tim McDermott, “but the spirit.”
Financial speculation about government policy has generated a fair amount of controversy in the past.
The markets were once a staple of American politicking before World War II. Wall Street brokers drove the wagering—which in the 1916 presidential election exceeded more than $200 million in today’s dollars. The sum was roughly twice the total spending on election campaigns that year.
The death knell, to president futures, might have been the 1939 legalization of pari-mutuel betting on horse races that gave eager gamblers a better fix than a drawn-out campaign.
But Nadex hopes the grueling pace of modern-day campaigning will help their contracts capture the turbulence, swinging in response to every triumph and each gaffe. Political futures are coming to an exchange near you!
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