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Political Gaming? A New Push for Investors to Cash in on the 2012 Election

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If Yossi Beinart has his way the results of major U.S. elections won't just be about hypothetical tax changes, military policy, and public works programs; they'll impact your wallet directly via trading. The CEO of the North American Derivatives Exchange (or NADEX) says he's "trying to introduce a set of contracts that allow you to trade the outcome of an election."

Specifically, investors in these contracts would be able to buy or sell candidates based on what they view to be the probabilities of election results. As is the case with Intrade.com, candidates would be priced somewhere between 0 and $100 based on "market wisdom." President Obama's chances of re-election are currently 52%, according to Intrade. If you buy Obama contracts at $52 and he wins, you'd get your money back plus $48 in profits. If the President were to lose, Obama buyers would lose all $52.

The major differences between Beinart's proposed offering and Intrade or the Iowa Electronic Markets are primarily regulation by the CFTC and being open to "every day" U.S. investors. Beinart says this regulation will protect traders by increasing transparency and lessening the political biases buried within mainstream polls like Gallup or various news outlets.

Beinart's proposed markets would only involve major elections, in other words, those with the most liquid markets. The advantage of a free-market system is the money to be made off mis-pricing. Supporters of, say, Romney or Obama, could certainly move the price on the margin but in so doing would create a trading inefficiency quickly corrected by the marketplace. In other words, a corrupt pol could create a fleeting perception that their candidate had a 75% of winning but there would be too much money to be made shorting that price to allow the odds to stay so high.

Beinart's final level of protection for retail clients would be a cap on the size at which traders could bet. Election futures would be capped at $250,000 in nominal value. In other words, the most you could wager on a 50/50 election would be $125,000. Not chump change to be sure, but hardly in the league of MF Global losing $1.2b on "safe" assets.

When, if ever, will futures on the 2012 winner of the Presidency and control of the House and Senate be available? That's up to the CFTC which is currently reviewing Beinart's proposal. The final decision will be released within the next two-and-a-half months.

In the meantime there's nothing to stop Breakout from conducting its own poll on the matter.

Should political futures contract trading be legalized and regulated? Vote below then tune in tomorrow for a spirited debate between me and Matt Nesto.