Weather the most frequently traded forecast contracts at Interactive Brokers: Founder

Interactive Brokers’ ForecastEx platform, which allows investors to buy ‘yes’ or ‘no’ contracts based on stated outcomes for specific indicators, is currently seeing temperature contracts as the most frequently traded on the platform, according to the firm’s founder and chairman Thomas Peterffy.

ForecastEx hosts prediction markets and Interactive Brokers believes these will increasingly be utilised for risk hedging and risk transfer.

During the Interactive Brokers earnings call last week, Nancy Stuebe, Director of Investor Relations provided some colour as to how uptake of the prediction market contracts is progressing for the firm.

“On ForecastEx, we created this exchange, which is regulated by the CFTC, to support trading on consequential predictions that have measurable, third-party-verified outcomes,” Stuebe explained.

Adding that, “ForecastEx traded 286 million pairs this quarter, up from 15 million pairs in the third quarter, and now has four members quoting into the exchange, which now has over 10,000 listed instruments.”

Thomas Peterffy, Founder and Chairman of the company, explained later in the call that weather related contracts is the area seeing the broadest uptake so far.

Asked about institutional adoption of prediction markets like ForecastEx, Peterffy commented, “So our most frequently traded contracts are temperature contracts. We are currently working on tying up these temperature contracts with the electricity contracts and the natural gas contracts.

“And as you know, it is basically the utilities that have to every day make a judgement about the next day’s use of electricity. So we are working on approaching those. And I think that sometime in the course of the year, you will see them onboarding.”

Weather conditions affect huge numbers of businesses, while also being a risk held in most investment portfolios as well. Hence new instruments that can simply help users hedge out effects of weather on their bottom-line, or portfolio returns are gaining attention, while they could also provide efficient hedging mechanisms for those in the insurance, reinsurance and insurance-linked securities (ILS) industry.

Peterffy believes there is scope to expand the range of contracts available, saying, “We do believe that these contracts will have enormous applicability to many, many things about the future and they will be very, very successful.”

Already the company is seeing weather risk hedging and trading as a use-case gaining meaningful adoption and outside of weather parameters such as temperature, the ForecastEx platform is also seen as applicable to certain catastrophe contracts, such as hurricane risks.

In a recent interview with Artemis, Patrick Brown, Head of Climate Analytics at Interactive Brokers told us that he expects to see more uptake among constituents looking to hedge and invest in instruments with exposure to catastrophes and severe weather.

In that interview Brown also explained that there are certain advantages that forecast contracts bring, in comparison to parametric products including insurance and other risk transfer instruments using parametric triggers.

Other prediction markets have also featured weather and catastrophe related contracts and as this trend develops it will be interesting to see if these use-cases are additive to the volumes of risk being traded and transferred, or if they start to eat into volumes of other instruments such as temperature related weather derivatives.

Weather derivatives have long been an unsung hero of the parametric risk transfer world, having at certain stages in their lifespan experienced significant volumes, at others been somewhat overlooked.

Under-hyped and under-sold, weather derivatives perhaps never received the marketing attention they deserved. But prediction markets and forecast contracts can offer similar utility to those seeking a form of weather risk hedging or protection through a modern technical infrastructure, while also offering a novel way to gain exposure to weather risks for those looking at allocate capital.