The CME Is Becoming the DraftKings of Exchanges

One of the world’s largest derivatives exchanges is making a dangerous play for retail investors.

CME Group Inc. plans to offer the trading masses options to punt on whether stocks, gold, oil – or virtually any other asset – will rise on a given day. These will be yes/no contracts, such as: do you think stocks will rise today? If you answer “yes,” and the market finishes up, the contract pays off. If you answer “yes,” and the market goes down, the option expires worthless. Contracts like these have been popularized by sports- and politics-betting sites. And so, with every passing day, the markets asymptotically approach the financial sophistication of DraftKings Inc.

The new CME contracts will encourage pure speculation, serving practically no economic purpose. There is lots of economic utility in plain vanilla options. You can buy puts to protect a bet on a stock rising; or sell calls against a long stock position to hedge it and earn a premium; and you can construct more complex wagers involving different strikes and maturities to obtain the risk profile you want.

Betting on whether stocks, oil or gold will be up or down in a day is just a punt, the kind you make with a friend over beers. It’s simple and easy to understand, which is what makes it so dangerous. Lots of money has been lost at the roulette wheel betting on red or black. It’s another step toward the gamification of investing – a trend led by brokerage Robinhood Markets Inc. that sparked the meme stock frenzy – which risks breaking the link between price and value for the chimera of democratized markets, and a tidy profit.