Comment Text:
As a long time PredictIt user, I have found that the platform is extremely useful for helping me gauge my exposures in other areas and assets that I own, such as stocks. This is exactly why there is price basing. I don't know why you don't take the word of all the people who told you this in the Kalshi comments. Even the CME has realized this. I include here the text of a paid CME advertisement on the WSJ.
Confronted with this evidence, personal testimonial, and CME's own PAID advertisement, it is obvious that elections do matter, futures can be used to directly hedge the risks (which goes against your "attenuated" argument), and also futures markets like PredictIt's are used for price formation, which is one of the pillars of the economic utility test you tout. How are you going to dismiss this? Or are you going to accept it. If you ignore it, I think there's a pretty obvious litigation risk to your reg for violating the APA.
Also, the idea that election markets make you the election cop is laughable for all the obvious reasons that the commissioners said in the open meeting. However, since you are not going to respond to a comment that simply notes that the CFTC's argument about election cop is so specious that the public assumed it was satire (which I think is indeed what the public thinks), I will explain a little more in a precise manner that you are obligated to address under the APA. You ALREADY are the election cop. The CME is clear that elections impact the futures and options that it lists. If someone would manipulate an election, that will impact the CME's markets, which you regulate, and obligate you to investigate the manipulation, including the manipulation of the election. And not only that, you are obligated to investigate even ATTEMPTED manipulation of the market. So the issue is not whether you are the election cop, it's the degree by which you are the election cop. You are OK with a little bit of policing, but not a lot. That is (1) arbitrary and capricious, and (2) an abdication of your job, which is worse.
So, to sum up, and to aid the people who are drafting this final rule, I note that it is clear that election contracts have an economic purpose, I also note that they are distinguished from gaming by this purpose, and I note that the argument that about election cop is incorrect and ignores that there are existing CFTC regulated derivatives that can be manipulated, and attempted to be manipulated, but interfering in elections. And the fact that election exposure can happen indirectly does not in any way mean that it is not better to have contracts on the events themselves! It was NEVER the posture of the CFTC that "one product is enough". The point is to let the market decide what product is best.
Here is the CME's paid advertisement printed in WSJ Business:
By Ivan Castano for CME Group
When Donald Trump clinched the U.S. presidency in November 2016, overnight derivatives trading volumes surged to historical levels.
Fast-forward eight years, and we’re in the midst of another election cycle where market participants are keenly aware that unexpected outcomes are possible. This time, however, it includes not just Washington’s top job but also a change of guard in 65 countries representing roughly 4.2 billion people.
On top of the U.S., the U.K. and Europe are also holding general elections alongside Mexico and other leading emerging markets, such as India. These events, which mark the biggest poll-setting agenda in history, could inject fresh risk and uncertainty into global markets.
In the U.S., for example, trade, immigration and foreign policy could influence economic conditions and voter opinions. Meanwhile, in the U.K., Labour Party candidate Keir Starmer is in a closely contested race with incumbent Rishi Sunak. The winner will inherit a weakening economy hurt by stubborn inflation as rate hikes have largely mirrored those of the U.S. In Europe, meanwhile, the Parliament holds elections in June, fueling new risks that could pressure the euro.
Managing Market Risk
In the U.S., historical stock returns are somewhat muted during election years. Since 1928, the average stock market gain in a presidential election year is 7.5%, slightly lower than the overall average of 8.5%.
In recent years, however, there have been some uneven results, particularly in equity options trading.
In the fourth quarter of 2022, there were 8.1 million equity options on futures contracts traded at CME Group, with 1.7 million changing hands in the run-up to the U.S. midterm elections on November 4. However, in the days leading to the 2020 presidential election there were no volume surges compared to a huge spike immediately following the 2016 vote, when futures and options volumes at CME Group soared to a record 44.5 million contracts the day after the election.
As traders mull positioning around this year’s unique election cycle, equity index options tracking the U.S. stock market could become a focus for market participants. These contracts allow traders to make round-the-clock futures and options trades on the S&P 500, Nasdaq-100, Dow Jones and Russell 2000 indexes.
You can choose to increase or decrease exposures to certain risk events, such as elections, with multiple option expirations available every day of the week.
Brian Burke, Senior Director of Equity Products, CME Group
Options allow traders to take directional positions by either buying (going long) or selling (going short) a particular underlying futures contract at a specified price on or before a specified date. With multiple weekly expiries, they can trade with precision around risk events like an election or a central bank policy announcement.
“With the precision that options provide, you have multiple ways to trade certain events. You can choose to increase or decrease exposures to certain risk events, such as elections, with multiple option expirations available every day of the week,” says Brian Burke, senior director of equity products at CME Group.
Global Trade in Focus
Trade policy is one of the most watched issues in the U.S. and beyond this year, and provides an example for how indexes could respond to election results.
The S&P 500’s top components include a broad swath of U.S. multinationals such as Apple, Microsoft and Amazon that have facilities and operations in many countries and could be negatively impacted by trade protectionism. In contrast, the Russell 2000, which is made up of mostly small and midsize U.S. firms, could be less pressured by these policies, according to analysts.
With the index choice available among these key indexes, investors can tailor exposure to risks associated with varying indexes’ sensitivity to U.S. dollar fluctuations, Burke notes. The Russell 2000, for instance, is more sensitive to dollar fluctuations as it’s heavily U.S.-focused, while the S&P 500’s large-corporate constituents typically have diversified revenue streams across several underlying currencies, which render them less exposed to currency market movements.
In this regard, index choice matters. “If investors are looking to gain broad access to large multinational corporations, the S&P 500 or Dow Jones Industrial Average Index futures and options could provide this risk exposure, whereas for tech-focused exposures, Nasdaq-100 is often the index of choice,” Burke explains. “The Russell 2000 Index provides small-cap, higher beta exposure. So there is a liquid futures or options vehicle available regardless of investor risk management needs.”
Some market analysts say a win by President Joe Biden or former President Trump won’t matter much for the trade outlook.
“For many people the big concern is the U.S. and China and anything that will drive that,” says FX market strategist Ed Moya. “I expect trade tensions to escalate regardless of whether Biden or Trump wins the election and for the deglobalization trend to continue.”
The further you go to the left or the right, the more you can expect hamstrung legislatures that could fall into a lack of consensus, creating increased risks and volatility.
Mark Connors, Research Director, 3iQ
Some futures traders see the equity index response to the U.S. election as an opportunity, with the potential for volatility in November.
Bob Iaccino, co-founder and chief markets strategist at Path Trading Partners, says traders could buy equity index call options to benefit if they expect a volatility spike right before the election. Conversely, they could buy a put spread, a risk-controlled bearish strategy that would benefit if markets turn lower, which Iaccino expects will eventually happen regardless of who wins in November.
Party Politics
Mark Connors, research director at bitcoin ETF manager 3iQ, adds Europe’s increasingly polarized politics are also a major concern.
“Are we going to see a greater movement from the center like we did in Argentina with Javier Milei, or can we see more moderate candidates?” he asks. “The further you go to the left or the right, the more you can expect hamstrung legislatures that could fall into a lack of consensus, creating increased risks and volatility.”
In Mexico, a victory for the incumbent Morena Party and candidate Claudia Sheinbaum could mean Mexico’s relations with the U.S. remain stable, at least from Mexico City’s side.
Latin America’s second-largest economy ships roughly 90% of its goods north of the border. The “nearshoring” phenomenon is expected to transform Mexico’s economy, bolstering U.S. exports to a whopping $600 billion by 2028 from $455 billion last year, according to analysts.
On the other side of the world, India is also in the spotlight, holding general elections set to culminate in June. Incumbent candidate Narendra Modi is expected to win a third term. Since Modi’s right-wing BJP party took power in 2014, the S&P BSE SENSEX index, a bellwether for the Indian stock market, has returned about 13% annually and about 20% over the past year. Still, some investors have cautioned that valuations are overstretched and could be due for a correction.
Soaring Interest in Options Trading
As economic uncertainty has grown in recent years, more traders have entered the options market. Smaller-sized contracts like micro-sized futures have also emerged as tools for sophisticated retail traders. Equity options at CME Group have been gaining traction overall, with more than 1.9 million in average daily trading volume in April, up 76% from a year earlier. On March 10, 2023, a record 2.8 million contracts swapped hands following the collapse of Silicon Valley Bank, revealing the interest in options for both expected and unexpected market risks.
With elections quickly approaching around the globe, there is a lot for market participants to consider as voters go to the polls this year. Burke says one advantage for traders is knowing the date of the big event.
“For all of these elections, volatility can significantly differ before and after the key event; market participants now have the ability to tailor their exposures to directional and volatility risks better than ever before,” he notes.
