North American Derivatives Exchange (Nadex)

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Nadex, The North American Derivatives Exchange
Nadex-n.jpg
Founded 2004
Headquarters Chicago, IL
Key People Timothy McDermott, CEO
Products Derivatives exchange
LinkedIn Profile
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.

Nadex ranked 37th in global derivative exchange volume in 2018 with 12.3 million contracts traded, up 18.3 percent from the previous year, according to the FIA Annual Volume Report.[2][3]

History

Nadex originally was known as “HedgeStreet,” 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 in late 2007. Shortly thereafter, UK-based IG Group Holdings plc. agreed to purchase HedgeStreet, Inc. for $6 million and began restructuring the exchange, its technology, and its products. In 2009 HedgeStreet was renamed as the North American Derivatives Exchange (Nadex).

Some of the more significant developments following the acquisition included:

  • Re-opening for business in February 2008 under a new management team in Chicago.
  • Replacing all technology and adding new data centers in 2008, a front-end platform in 2009 and a back-end matching and clearing system in 2010.
  • Revamping product offerings - Indices, bull spreads, binary options, 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.

Leadership Moves

In 2013, Nadex CEO Yossi Beinart was named the new CEO of the Tel Aviv Stock Exchange and Timothy McDermott was named CEO designate and eventually took over as CEO.[4][5]

Key People

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.[6] 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. [7]

On December 18, 2017, Nadex launched Nadex Bitcoin Spreads, which allow retail traders to take short-term positions on the price of bitcoin. The contracts are listed for trading on Nadex's regulated exchange and will be cash-settled in U.S. dollars.[8]

Contracts

Nadex contracts are in the form of Binary Options and Bull Spreads.

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:

  1. Crude oil futures are currently trading at $95, and you think it will end the day above $95.
  2. $95 becomes your strike price, and you pay $40 to buy the contract.
  3. Another market participant believes that it will close the day at or below $95, and puts up $60 to express his/her opinion.
  4. If you are correct you collect $100 and your profit is the difference between the $100 payout and the $40 you spent.
  5. 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.[9]

Nadex Bull Spreads

Nadex also lists Bull Spread contracts. Bull Spread contracts on Nadex represent a single contract with a floor and ceiling range.

The 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. Conversely, when you sell a Bull Spread you are speculating that the underlying market will be lower at the time of settlement.

The Nadex Bull Spreads have both a floor and a ceiling associated with them. 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 Nadex 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.[10]

Funding

Nadex requires traders to fund the maximum risk of any trade before the position can be opened. This maximum risk is defined as the difference between the 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.

Trading Fees

The customers of Nadex who joined the exchange after August 17, 2011 need to pay the standard trading and settlement fees as follows:[11]

  • Trading fees: customers pay trading fees on each side of their trades: once to open and once to close. The fee for each lot is $0.90 with a maximum charge of $9 per side.
  • Settlement Fees: Nadex does not charge settlement fees on trades that settle out of the money. The fee for each lot is $0.90 with a maximum charge of $9 per settlement.

For other fees and details of Nadex fee schedule, see Nadex Fee Schedule

Educational Tools

Traders can visit the Nadex Academy or the Nadex YouTube channel to learn more about implementing bull spread or binary option contracts.[12]

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

  1. Nadex. The North American Derivatives Exchange.
  2. FIA Annual Volume Survey 2017. Futures Industry Association MarketVoice Magazine.
  3. 2018 Annual Volume Survey. Futures Industry.org.
  4. Nadex Announces New CEO, Tim McDermott. PR Newswire.
  5. John Lothian Newsletter: Brakes on High-Speed Futures Trades Would Do Harm; Euronext seeks ETF trading boost; Chicago Fed’s Evans Backs Scrutiny of High-Frequency Firms. John Lothian News.
  6. Nadex Files to Offer Political Event Contracts on 2012 Presidential Election; Senate, House Majorities. MarketWatch.
  7. CFTC Issues Order Prohibiting NADEX's Political Event Derivatives Contracts. MondoVisione.
  8. Nadex Launches Bitcoin Spreads. Nadex.
  9. Binary Options. Type of contracts available.
  10. Bull Spreads. A step by step guide to Bull Spreads.
  11. Nadex Trading Fees. Nadex.
  12. Nadex YouTube Channel. Subscribe to Nadex on YouTube.

External Links