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Update on IBKR: ForecastEx

10 October 2024

IBKR launches Forecast contracts by ForecastEx, a CFTC registered Designated Contract Market and Derivative Clearing Organization. ForecastEx is a wholly owned subsidiary of IBKR.

Extract from its announcement:

Contracts listed on ForecastEx are simple and intuitive. For example, suppose an investor believes an event will occur, such as an increase in the US Consumer Price Index above a specific value. In that case, they can buy a "yes" contract. Conversely, if they think the event will not happen, they can purchase a "no" contract. Contract purchase prices range from $0.02 and $0.99. The value of these contracts will continue to fluctuate based on market participants’ evolving judgment of probabilities, directly reflecting the collective market view of the likelihood of the event. Upon the event's resolution (e.g., the moment the US Bureau of Labor Statistics announces the CPI), the contract settles at a predefined value — $1 for a correct contract and $0 for the incorrect one.

Another interesting feature is that ForecastEx is offering interest on contracts for each day they are held (and assuming interest rates aren’t at zero). The longer you hold that position, the more interest you’re going to make, so it is no longer a zero-sum derivative. The interest rate equals to average Fed Fund Rate minus 0.5%.

The idea that IBKR founder Thomas Peterffy has is to create a market that can teach people to think in terms of probability and let people put money where their mouths are.

Peterffy put it this way: “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.”

Besides Forecast contract on general economics indicators such as CPI, Fed funds rate and etc, there are also some interesting Forecast contracts available on thing such as global sea level, CO2 emissions as well as US Presidential Election.

Peterffy spent several years with Downey to create the craft the entire ecosystem and gets approval from CFTC. he platform now offers zero-commission forecast contracts to customers. Since ForecastEx is owned by IBKR, this gives them a de facto monopoly, even though other brokerage firms can access the platform—most cannot afford to offer zero commissions.

The timing of this approval is ideal, as it arrived just before the U.S. presidential elections, which is expected to attract many new customers to the platform. Customer growth has already reached 28% this year, even before the introduction of this innovative product. Combined with the company’s various other advantages as spelled out in our previous write-up, the overall outlook remains positive.

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