Several finance companies have created prediction markets, but traders must hold their contracts to maturity for a chance at a payout. Only ForecastEx rewards traders for holding their contracts.
“A customer buys a yes or buys a no,…and at the end of each month, I rebate all of the interest paid back to the futures commission merchant. The FCM can do whatever they want with that money. We know that Interactive Brokers is going to keep 50 basis points and they’re going to return 483 basis points back to the customers based on the value of their position.”
This payout is unusual among prediction markets. Most event contracts must be held to maturity to see any money. But some of ForecastEx’s markets forecast as far out as 2035. No trader would wait that long for a payout on a volatile financial instrument. So, traders are incentivized to hold on to contracts in markets that may not pay out for over a decade.
This model creates a new challenge for an area of finance that regulators are struggling to define.
Why Offer Forecast Contracts?
ForecastEx doesn’t offer forecast contracts for entertainment. They’re part of Interactive Broker’s vision for bringing future-looking attitudes to developing economies.
“He [Interactive Broker’s founder] has customers in almost 200 countries and he looked out and said ‘A lot of these countries don’t have truly established economies.’ And what he wanted to do was introduce economics to these people and importantly he wanted to get people thinking about the future using probability.”
Modern economies are founded on faith in the future. It’s how economies transitioned from economies founded by plunder from war to modern industrial economies. Startups and their investors also require forward-thinking attitudes to take uncertain leaps together.
Derivatives force the traders who hold them to look to the future. But only ForecastEx’s forecast contracts can be held for years at a time. They’re bought to be held instead of trading when the price move’s in a trader’s favor. That complicates the regulatory space that ForecastEx exists in.
“We list contracts that go to 2035. What’s the national debt going to be in 2035? We want people to think about it.”
What Forecast Contracts Aren’t: Futures, Options, or Event Contracts
Event contracts are futures contracts on real world events. They pay out when events come true and pay nothing if the events don’t occur. However, there’s no CFTC definition for event contracts that pay interest. It’s why ForecastEx has termed their contracts forecast contracts instead of event contracts.
However, they’re not futures, options, or swaps, either. Futures don’t pay interest, and there’s no option to buy the The CFTC may label forecast contracts as swaps, but swaps involve two traders switching contract terms. They’re direct trades with other traders. In contrast, neither side of a forecast contract overlaps.
“The yes and no get paired together. They don’t trade with each other. They’re trading two different instruments. The yes is an instrument of itself. The no is an instrument by itself, and we just pair them together by price. And they never share the same price. The yes and the no will never, ever share a price.”
Above all, forecast contracts are not binary options. ForecastEx prides itself on creating a derivative that rewards long-term investors as well as speculators. Binary options allow a zero-sum win or lose outcome while forecast markets offer variable payments over long periods of time through a volatile investment vehicle.
“They [regulators] slurred our contract by calling us a binary option.”
What Regulatory Steps Are Next?
ForecastEx has designed a derivative that’s different from others in small ways. Traders don’t trade with each other, and they can earn interest on investments that used to be zero-sum. However, financial regulations don’t reflect the new reality.
“When they wrote the rules back in the 2008, 2009 Dodd Frank [Act], they never anticipated a fully collateralized contract, and they never anticipated the innovation of the pairing. And so the rules do not really fully apply.”
ForecastEx isn’t engaged in lawsuits with its regulators like PredictIt and Kalshi are. However, regulated prediction markets are united in their need to secure regulations that reflect the important differences between them and other derivatives.
As ForecastEx navigates regulatory schemes that don’t necessarily fit its investment instruments, it remains dedicated to the vision that inspired it.
“That is in keeping with our vision of trying to teach people to think in probability, about the economics and the resulting reports coming out of governments about how economics is working in every jurisdiction.”
