Interactive Brokers Group (NASDAQ:IBKR) just launched ForecastEx, a new trading service designed to allow investors to bet on the outcome of economic data releases and other events. Indeed, the ForecastEx exchange is a contract and derivative prediction market that will allows investors to bet on specific economic events.
“ForecastEx is a prediction market that we have been working on and experimenting with for nearly 10 years,” said Interactive Brokers founder and Chairman Thomas Peterffy. “The more perfect information we have about the state of the world, the more perfectly we can plan and coordinate our actions. Markets are the most direct ways of expressing our unbiased expectations, and market prices tell us the prevailing consensus. We may adjust our plans based on consensus forecasts or express our disagreement to earn a profit or hedge our exposures.”
ForecastEx operates somewhat similarly to the likes of interest rate futures, which are determined by the trade of interest rate derivatives like trading bonds. These probabilities are what make up the likelihoods presented on the popular CME FedWatch Tool.
How Does ForecastEx Work?
Contracts listed on ForecastEx are fairly intuitively. The example Interactive offers involves a contract on a rise in the upcoming Consumer Price Index (CPI) inflation report.
If you believe the CPI will come out higher than a given value, per the contract, you can purchase a “yes” contract. Or, if you predict the CPI will fall short of a given value, you can opt to purchase a “no” contract.
The price of the contracts will range between 2 cents and 99 cents. Prices will vary depending on market participants’ expectations and other general considerations related to the event in question.
Alongside the CPI, ForecastEx contracts will be available for the likes of the Fed Funds target rate, U.S. consumer sentiment, the unemployment rate, GDP, climate metrics and more.
The contracts have weekly, monthly, quarterly and annual expiration periods, which Interactive will “pay interest at 0.5% under the prevailing Fed Funds rate on the closing market value of positions.”
While it’s unclear exactly how useful the market will be in clarifying the probability of certain economic outcomes, it’s certainly a fascinating extension of futures markets.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
