Binary options in a prediction market are options to speculate on the value of an asset, and whether that value of the asset will remain the same for the next one hour to one day period, whether it will become more valuable in that time period, or whether it will decrease in value in that time period. The predictive markets are simply speculative and they were created just for these sorts of trades.
The binary option in a prediction market rewards the individuals that buy low and then turn around to sell high. The individuals that buy high and then turn around and sell low are admonished. Their activities are seen as being degrading to the predictive market.
History of the binary options in a prediction market
You can say that predictive markets have been in place as long as elections have been being held. Betting on who would win the election was very common until sometime around the 1940s. There were even formal markets on Wall Street that handled these bets. The major newspapers and radio news programs posted the conditions of these markets so they could give people an idea of how close the race was. These predictive markets were remarkably accurate about who would win the election and they had thousands of people that participated in them.
Possibly the most famous of all predictive markets is the University of Iowa’s market they called the Iowa Electronics market. This market was first introduced during the presidential election of 1988. This market allows the traders to buy and sell contracts based on the common assets that would be used in predictive markets. The difference in the Iowa electronics market is that the activity is genuine, but it is a not for profit. It is designed purely as an educational tool. The results of the Iowa electronics market predictions on who would win presidential elections have been more accurate than the pools have been.
Another highly regarded predictive market was the 1996 Hollywood Stock Exchange. This was a virtual market game when it started and today the Hollywood Stock Exchange is a part of Cantor Fitzgerald, LP. Players of the game buy and sell things like prediction shares of how much movies will bring in at the box office, directors, actors, and all film related options. In 2006 this game was correct in the predictions of thirty two of the thirty nine Oscar Nominees for the major categories. The game also predicted seven out of eight of the top winners in the major categories.
HedgeStreet was designated in 1991 as a predictive market. It is regulated and governed by the Commodity Futures Trading Commission. It allows traders online to make speculations concerning economic events that may, or may not, occur.
Are prediction markets legal?
Online gambling within the United States is strictly regulated. For this reason the majority of predictive markets online that target traders from the United States only allow their traders to use virtual money. Real money does not change hands so that no federal or state laws will be broken during the activity.
The Iowa Electronics markets are an exception to this rule. The Commodity Futures Trading Commission allows bets on this predictive market that are $500 dollars are less. This activity is legal because of a no-action letter the university got from the trading commission. There are also exceptions being made for Intrade/TradeSports which was allowed to accept United States clients up until November of 2012.
There are large numbers of predictive markets that you may not be aware of. They are at least entertaining to engage in.