Just when it looked as if every imaginable variety of risk could be identified, valued and hedged — from freight to real estate to weather — a new variety of risk comes along. In this case, it’s the American Civics Exchange (ACE), a market designed to help institutions protect themselves against political risk. Of course, people have been placing informal political bets for centuries. But ACE is the first U.S. commercial market for policy futures. CEO Flip Pidot, a former value manager with Boyar Asset Management in New York who in 2006 ran unsuccessfully as a Republican for a New York state senate seat, dreamed up ACE with several partners. “It’s the last remaining significant category of external financial risk,” says Pidot, a former fraud investigator with defunct accounting firm Arthur Andersen.
Pidot and ACE co-founder and CEO Paul Lang, who lost a Pennsylvania state senate election as a Democratic candidate in 2006, started working toward getting approval for the exchange from the Commodity Futures Trading Commission (CFTC) in 2008. In 2009, ACE got clearance to establish an exempt board of trade (eBOT), viewed by some as a “regulation-lite” classification that would allow the exchange to operate if, among other restrictions, it was open only to institutional traders.
Pidot and Lang didn’t enjoy their eBOT status for long. With the July 2012 passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, eBOTs were eliminated and replaced by swap execution facilities (SEFs), created to roll up over-the-counter swaps. The wait for SEFs to come online and the arduous task of applying for new approvals sent the pair back to the drawing board to find another way to launch their political-risk exchange. They decided to partner with an as-yet-unnamed major trading platform, pending federal approval. Under the new plan, ACE will no longer be the regulated entity. Instead it will originate, structure and design contracts that will be licensed to the partner, an established designated contract market (DCM). Contracts will then clear through the DCM partner’s clearinghouse.
Industry experts are intrigued. Derivatives and exchange adviser Patrick Young, author of the 1999 book Capital Market Revolution: The Future of Markets in an Online World, first met Pidot in 2012 when Young was staging his first annual Young Markets conference in Paltinis, in Romania’s Transylvania region. Young, who is presently rolling out a technology start-up café in Torun, Poland, birthplace of astronomer Nicolaus Copernicus, says ACE has potential. “It brings in speculators and allows people to reduce or transfer their exposures,” he says. His conclusion: “If Flip can come in with a platform allied with an established platform, ultimately, it should work.”
While ACE waits for approval of its trading platform, it’s running its prediction model online. Users can try their luck with scenarios such as the 2014 midterm elections, Bitcoin regulation and the Russia-Ukraine standoff. This live, if fictional, portfolio trading has given Pidot insight into market efficiencies. For example, he has found the market to be a more reliable indicator than economic factors of how policymakers will react to data such as employment reports. Traders on the site work with play money. But there are incentives for users to bring their best tactical strategies to the virtual trading floor: Winners can come away with up to $5,000 — that’s real money — courtesy of the exchange’s angel investors.
Pidot says that because trading on elections gave regulators pause, the exchange took it off the trading platform to prevent electoral manipulation. Elections will stay on ACE’s play-money website, however.
