North American Derivatives Exchange (Nadex)
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| Nadex, The North American Derivatives Exchange | |
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| Founded | 2008 |
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| Headquarters | Chicago, IL |
| Key People | Yossi Beinart, Chief Executive Officer and President |
| Products | Derivatives exchange |
| Corporate Website | www.nadex.com |
The North American Derivatives Exchange, Inc. (Nadex), formerly known as HedgeStreet Exchange, is a CFTC-regulated, retail-focused, online futures exchange. Nadex offers investors the opportunity to trade small, inexpensive, capped risk derivative contracts,[1] including binary options in a wide range of markets.
Nadex is a wholly owned subsidiary of the U.K. based IG Group Holdings plc.
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History
Nadex originally was known as “HedgeStreet” and was based in San Mateo, California. The Exchange was launched in 2004 offering an electronic marketplace that allowed online retail investors to trade financial derivatives. After more than three years in operation, HedgeStreet shut down its business in late 2007. Shortly thereafter, HedgeStreet announced that UK-based IG Group Holdings plc. had agreed to purchase HedgeStreet, Inc. for $6 million. Soon after the acquisition in December 2007, IG Group began restructuring the exchange, its technology, and its products, including renaming HedgeStreet as the North American Derivatives Exchange (Nadex) in 2009.
Some of the more significant developments following the acquisition included:
- Re-opening for business in February 2008 under a new management team in Chicago, Illinois.
- Replacing all technology (in stages). New data centers – Summer 2008. Front-end platform – Summer 2009. Back-end matching and clearing system - Fall 2010.
- Revamping product offering - Indices, Bull Spreads, contract sizes
- Allowing intermediation - On March 30, 2010, the CFTC issued amended orders of DCO/DCM registration, allowing Nadex to clear trades intermediated through FCM Members, in addition to the trades of its non-intermediated, direct retail trading members.
- On Dec. 9, 2010, PFGBEST became the second Futures Commission Merchant (FCM) member to join the exchange, since Nadex received CFTC approval to allow customers intermediated access through FCMs.[2]
Key People
The following individuals serve as members of the board:
- Yossi Beinart, CEO and President, North American Derivatives Exchange, Inc.
- John Collins, Partner, Collins & Collins
- Peter Hetherington, Chief Operating Officer, director, IG Group Holdings plc
- Robert Kolb, Director, Professor of Finance, Loyola University of Chicago
As of June 2011, in addition to Yossi Beinart, the following people comprised Nadex's management team:
- Debra Rabichow - Chief Operating Officer
- Tim McDermott – General Counsel & Chief Regulatory Officer
Membership
Direct Trading Members of the exchange have access to a comprehensive trading platform including order entry, market depth, historical data services, cash accounting and position reporting. Membership is free, and members can trade with as little as a $100 initial deposit.
Markets
Nadex contracts span a range of underlying markets, from commodity futures and spot forex rates to economic indicators and equity index futures. As of June 2011, the exchange's product line includes US and international equity index contracts (Wall Street 30, US 500, US Tech 100, German 30, Korea 200, SmallCap 2000, FTSE 250), energy contracts (crude oil, natural gas), spot forex rates (EUR/USD, AUS/USD, GBP/USD, USD/CAD, USD/CHF, USD/JPY) including cross-rates (GBP/JPY and EUR/JPY), metals (gold, silver, copper), agriculturals (corn, soybeans), and event contracts (initial jobless claims, Fed Funds, European Central Bank rate announcements, nonfarm payrolls, unemployment rate.)
On December 19, 2011, Nadex announced it had filed a notice of intent to offer for trading "Political Event Contracts" on the 2012 elections for President of the United States as well as majority party control of the U.S. Senate and U.S. House of Representatives. It planned to launch the contracts around January 2012. The contracts would have allowed Nadex market participants to take an economic position on the outcome of the most important national election results in 2012.[3] However, on April 2, 2012 the CFTC issued an order prohibiting Nadex from listing political event derivatives contracts. The CFTC determined that the contracts involved gaming and were contrary to the public interest. [4]
Contracts
Nadex contracts are in the form of Binary Options and Bull Spreads.
Understanding Binary Options
Binary Options are relatively simple in the sense they have only two outcomes - correct or incorrect. Binary Options are similar to traditional options but with one key difference: their final settlement value will be 0 or 100. This means that the maximum risk and reward are always known and capped.
If the option expires in the money, each contract settles at a value of $100. If the option expires out of the money, each contract expires at a value of $0. You are not restricted to holding a position until expiration, though – you may place orders to trade in and out of positions at any point prior to expiration.
A huge range of strike prices, expiration times and underlying markets are available, making Binary Options the easy way to take a position on economic events, stock indices, forex, and commodities.
Binary Options are offered on global stock market indices, major FX rates, Crude Oil, Gold and other commodities with a wide range of strike prices for various intraday, daily and weekly expirations.
Orders can be placed to open new positions or close existing positions throughout the life of each contract. The contract size for Binary Options is small – each lot has a maximum contract value of just $100, making these an ideal introduction to the markets for novice traders and an invaluable supplementary tool for the more experienced investor. Binary Option prices can move significantly even when the underlying market has very low volatility, creating multiple trading opportunities even in quiet markets.
Despite their potential volatility, binary contracts are designed to limit the risk to traders. There is a strict cap on the worst-case loss on any contract – each contract must settle at either $0 or $100. This offers the best of both worlds – multiple trading opportunities with a strict limit on market risk.
The following, shows an example of a binary options trade:
- Crude oil futures are currently trading at $95, and you think it will end the day above $95.
- $95 becomes your strike price, and you pay $40 to buy the contract.
- Another market participant believes that it will close the day at or below $95, and puts up $60 to express his/her opinion.
- If you are correct you collect $100 and your profit is the difference between the $100 payout and the $40 you spent.
- If the opposing market participant is correct, he/she collects $100 with a profit of the difference between the $60 he/she spent to register an opinion in the market and the $100 payout.[5]
Understanding Bull Spreads
Nadex also lists Bull Spread contracts. Bull Spread contracts represent a single contract with a floor and ceiling range.
Bull Spreads are settled on the basis of an underlying market. For major FX pairs this is the relevant underlying spot rate. For non-FX products this is generally a Futures market; for example, Crude Oil Bull Spreads are settled based on NYMEX* Crude Oil Futures prices. When you buy a Bull Spread you are taking a position that the underlying market will be higher when the contract expires. And conversely, when you sell a Bull Spread you are speculating that the underlying market will be lower at the time of settlement.
Every Bull Spread has both a Floor and a Ceiling associated with it. These represent the minimum and maximum levels at which the Nadex contract can be settled, no matter how far past either level the underlying market may have moved. The Floor and Ceiling values for each individual contract remain constant throughout the life of that contract. Because the settlement range of a Bull Spread is rigidly defined, the maximum possible loss (or profit) is always known in advance.
Contract size: $1 per point
All Bull Spreads are defined such that a 1-point (or 1-tick) movement means a $1 profit or loss per contract. For example, if you bought 5 contracts and later sold them for a 35-point gain your profit would be 5 x 35 x $1 = $175. Likewise, if you bought 10 contracts which were settled at a 19-point loss, you would lose 10 x 19 x $1 = $190. So whenever you trade a contract, you know that a 1-point movement is worth $1 per contract to you.
The definition of a 'point' can vary between different underlying markets. For example, Crude Oil is priced in dollars and cents, i.e. $71.58, whereas the Wall Street 30 is quoted as a whole number, i.e. 10625. In each case, one point is a movement in the last digit, i.e. $0.01 for Crude Oil and 1 index point for the Wall Street 30.
Trading Bull Spreads
When you open a position in a Nadex contract, you do not have to hold it until expiration. You can enter an order to close, or partially close, your position at any time until expiration.[6]
Funding
Nadex requires you to fund the maximum risk of any trade before the position can be opened. This maximum risk is defined as the difference between your order level and the Floor level (for buyers) or Ceiling level (for sellers) - so these levels determine the funds needed to open a trade.
Comparison with Underlying Market
For Bull Spreads with a wide Floor/Ceiling range, the underlying market will generally be trading between the Floor and Ceiling values. The price of the Bull Spread in this scenario is likely to be very close to, or even identical to, the price of the underlying market.
In the case of Bull Spreads with a narrow Floor/Ceiling range the closeness of the Floor and Ceiling levels means that the underlying market might be trading near (or outside) these levels. This results in prices that reflect a much higher degree of optionality, differing significantly to the price of the underlying market.
Educational Tools
Traders can visit the Nadex Academy or the Nadex YouTube channel to learn more about implementing bull spread or binary option contracts.[7]
Virtual Mock Trading
Traders can practice using $25,000 in a Nadex demo trading account.
Risk Disclosure
Futures and options trading involve risk and are not suitable for everyone. The information presented herein is for informational purposes only. The contents hereof are not an offer, or a solicitation of an offer, to buy or sell any particular financial instrument listed on Nadex
References
- ↑ Nadex. The North American Derivatives Exchange.
- ↑ CFTC Approval. CFTC.
- ↑ Nadex Files to Offer Political Event Contracts on 2012 Presidential Election; Senate, House Majorities. MarketWatch.
- ↑ CFTC Issues Order Prohibiting NADEX's Political Event Derivatives Contracts. MondoVisione.
- ↑ Binary Options. Type of contracts available.
- ↑ Bull Spreads. A step by step guide to Bull Spreads.
- ↑ Nadex YouTube Channel. Subscribe to Nadex on YouTube.
