By Darrell Martin
On November 23, 2016, Nadex first submitted its intent to amend its settlement procedures to the CFTC. Since then, additional technological work was required. The new procedures are finally ready. They will go into effect for Demo trading on June 5, 2017 and for Production or Live trading on June 12, 2017. Included in the changes are new expiration value calculations and settlement procedures for all currency, commodity and indices contracts.
Instead of merely taking the average of the last 25 trades for non-FX products or 10 or more midpoints for FX products, Nadex will now collect data during the last 10 seconds leading up to expiration. This data will include all trades or midpoints during that time period.
For non-FX products, the highest 20 percent and lowest 20 percent of trades will be removed from the data set. The remaining prices will be averaged and rounded to one decimal point past the precision of the underlying market. Wall Street 30 will simply be rounded to the point of precision of its underlying market. (Point of precision = tick/pip size.)
For foreign currencies, the highest 30 percent and the lowest 30 percent of the midpoint prices will be removed from the data set. The remaining prices will be averaged and rounded to one decimal point past the precision of the underlying market.
If the removal of the percentages of trades or midpoints causes a non-integer number of trade/midpoint prices, this number of prices will be removed and rounded down to the nearest integer.
For any of the traded markets, if the time it takes to collect 25 trades for non-FX products or 10 or more midpoints for FX products exceed 10 seconds, then the expiration value calculation method reverts to the current process.
Nadex reports the expiration value calculation and settlement procedures for Event contracts will remain unchanged.
The Nadex Rulebook, chapter 12 lists the specific expiration value calculation and settlement procedures for each product class. This is a very detailed explanation of every market and comprises the last 175 pages of the document.
Since there is a difference in the starting dates between Demo and Live for this new expiration settlement procedure, the expiration values may not be identical. Contracts in the Production (Live) will settle based on the current method of calculation.
What does this mean to traders? All of the arithmetic averaging, rounding and the structuring that go into the settlement make it so that a trader cannot easily come in and impact the price without taking on substantial risk. The risk is not worth it for the binary or spread trader.
For more information on these changes, see Nadex Notices. Free day trading education is available at www.apexinvesting.com.