Iowa Electronic Markets Tippie College of Business University of Iowa iem@uiowa.edu What is the Iowa Political Stock Market? The IPSM is an exchange in which traders buy and sell financial contracts representing candidates for elective office. This year the exchange includes several markets involving the 1992 U.S. Presidential Election, the Two Party Presidential Election Market being the principal one. Two contracts are traded in this Two Party market, one representing each of the major parties. Those contracts are identified as follows: R.BU -- George Bush (R-Texas) D.CL -- Bill Clinton (D-Arkansas) Why does the IPSM exist? The Iowa Political Stock Market is operated for educational and research purposes with the approval of the Commodity Futures Trading Commission. For the directors it is a field experiment designed to study the predictive power of markets, the behavior of traders, and the dynamics of the political campaign. Participating traders are provided the opportunity to learn about financial markets through direct participation, and the motivation to follow the 1992 Presidential campaign more closely. They also realize the opportunity to make or lose money. How can I make money by participating? As in other financial markets, you make money by "buying low and selling high." Contracts will earn post-election dividends, or liquidation values, which depend on the fractions of the nation-wide popular vote won by the candidates. You will earn profits on any sale of a contract at a price higher than its ultimate liquidation value and on any purchase of a contract at a price lower than its liquidation value. How are liquidation values determined? Popular vote totals available a few days after the election will be used to compute liquidation values. In the Two Party Presidential Market, for example, each contract in the Republican candidate will earn $1.00 times the Republican share of the two-party vote, and each contract in the Democratic candidate will earn $1.00 times the Democratic vote share. All votes for independent and third party candidates will be disregarded in the determination of these vote shares. When did the market open and when will it close? The market opened for trading at 9:00 a.m., Friday, January 10, 1992, and it will remain open until 9:00 a.m., Wednesday, November 4, the day after the 1992 election. Traders can open accounts or add cash to existing accounts at any time prior to the close of the market. How much can I investment in the IPSM? The minimum investment in an IPSM account is $5.00 and the maximum is $500. The amount you invest will be posted to your cash account. Funds from this account can then be used to buy individual contracts from other traders or unit portfolios from the IPSM system. Why do I need a cash account? When you try to buy an individual contract or a unit portfolio you must have the cash to pay for that purchase. Your cash account provides you with the necessary liquidity -- purchases of contracts are charged to it, and sales of contracts are credited to it. Further, as markets close the liquidation values you earn on contracts in those markets will be credited to your cash account. Funds remaining in your cash account after the November election, including the credits from liquidations in all markets, will be refunded to you. What are "unit portfolios"? Unit portfolios are the means by which contracts are issued and placed in circulation. Each unit portfolio in the Two Party Presidential Market consists of one R.BU contract and one D.CL contract, and the price charged for it is $1.00. After unit portfolios are purchased from the IPSM, the contracts in it may traded individually with other participants in the market. Unit portfolios may be purchased at any time, and they may also be redeemed at any time for the same price of $1.00. The calculation of liquidation values guarantees that the ultimate value of the two contracts in a unit portfolio will be exactly $1.00, the same as the issue price of that portfolio. Thus the IPSM will neither make nor lose money through the issuance of unit portfolios; all amounts paid for them will be returned to traders in the form of liquidation values. What other markets are available on the IPSM exchange? In addition to the Two Party Presidential Market, three other markets are operational as of late July. A Three Candidate Presidential Market allows trading in two contracts, one representing Ross Perot and the other representing the Democratic and Republican candidates combined. Like the Two-Party Presidential Market, liquidation values depend on shares of the popular vote. Three contracts trade in the Presidential Plurality Market, one representing the Republican candidate, one for the Democratic candidate, and one for the independent Ross Perot. Liquidation values in this market will be $1.00 for each contract in the popular-vote plurality winner and $0.00 for each contract in the other candidates. The Presidential Derivatives Market involves a number of contract pairs. One such pair is "B54u -- Bush vote 54% or more" and "B54d -- Bush vote less than 54%". If the Republican candidate wins 54% or more of the nationwide two-party popular vote, the liquidation values will be $1.00 for B54u and $0.00 for B54d. The initial contract listing includes the pairs B54u and B54d, B50u and B50d, and B46u and B46d; other pairs may be introduced later in the campaign. Are there any commission or enrollment fees? The IPSM is unique among existing financial markets in that no commissions or other fees are charged to traders. The only payments you will make to the IPSM will be the amounts you choose to invest in the market, and the total of all invested funds will be redistributed to traders in the form of dividends or cash balance refunds. The IPSM is operated as a research experiment and all administrative costs are paid from research funds. How do I make trades? The IPSM is a fully computerized market with no brokers or other middlemen. Registered traders log into their market accounts from their own computer terminals to check market prices or account information and to extend offers to buy or sell. Cost free access is available from virtually any personal computer or terminal attached to a network at any college or university in the country. Telephone/modem access is also available, though traders must bear the cost of telephone charges. The market remains open 24 hours a day. Can I find the current market quotes without enrolling? Yes, information on market prices is available to the general public using the same market access procedures as those used by traders. In addition, a "practice" market is available for use by prospective traders to familiarize themselves with how the market works. Where can I get additional information? Contact the IPSM administrator to obtain a copy of the Trading Manual, enrollment forms and other information.