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David Downey’s Important Call: ForecastEx to Revolutionize Event Contracts with CFTC Green Light

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John Lothian

John Lothian

Executive Chairman and CEO

David Downey does not call me very often, but when he does, it is important. He called me on June 25. Unfortunately, I was in London and missed the call.

There is also this strange thing that happens when someone calls me from the Cboe and their caller-ID has the general Cboe number on it, the same one I still have in my phone for the work phone for Downey from his days at OneChicago. Downey appears to be calling me. Thus, sometimes when I get a call from a Cboe PR person, it comes up on my phone as Downey.

But on Monday, the real David Downey called with something important. Back on June 24, the CFTC had approved the registrations of a project he has been working on, ForecastEx, LLC. The CFTC approved both the DCM and DCO applications for this privately held company owned by Interactive Brokers Group, LLC. 

So this is a little different spin on a big issue that has confronted the industry and the CFTC over the last couple of years. You might recall that FTX wanted to disintermediate the FCM business and MIAX went out and bought Dorman Trading, a small Chicago FCM. ForecastEx, owned by FCM giant Interactive Brokers, has registered a startup DCM and DCO, or market and clearinghouse. And ForecastEx is clearly embracing the FCM model in their own model, even though the contracts are fully collateralized. 

The biggest innovation ForecastEx is bringing to its market model is to turn the whole concept of a market of buyers and sellers on its head. At ForecastEx, there are only bidders. There are no market makers or sellers of any kind. The contracts are event contracts that ForecastEx calls Forecasts, and a trader can bid for a Yes contract or a No contract to an event. 

A contract is not formed until the Yes bids and the No bids equal $1.01, at which time the contract is sent to clearing. At the event contract’s resolution time, the contract is settled and $1.00 is paid out to the winning Yes or No bidder, minus their initial investment.

Even though there is no selling, you can still get out of a contract before resolution by buying the opposite contract. So if you own the Yes on an event contract, buy the No contract and you will have offset your position. 

Another feature of the forecast contracts is that Downey said the exchange expects to pay out interest to the FCMs who have introduced business with the exchange. This is a little different; rather than being disintermediated, the exchange is paying FCMs a return on their excess clearing funds. 

Some of the contracts listed on the exchange, which is expected to launch on July 8, include US Initial Jobless Claims, US Unemployment Rate, US Retail Sales Monthly, US Building Permits, US Payroll Employment, US Consumer Price Index, US Consumer Sentiment, US Fed Funds Target Rate, US Housing Starts, US Real GDP, US Corporate Profits, US National Debt, Global Temperature, US Temperature and Atmospheric Carbon Dioxide.

Besides the backing of Interactive Brokers Group, LLC and Thomas Peterffy and Downey, there are some other industry luminaries involved in the project, including Bernie Dan and FIA Hall of Famer Steve Staszak on the board of directors.

In a CNBC interview on June 27, Peterffy told the network that these contracts give people the opportunity to “put their money where their mouth is on controversial issues.”

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