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Speaker 1: Hello and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Tracy Allaway and I'm Joe Wysn't thal Joe. Sometimes
Speaker 1: sometimes I go on prediction market, Yeah, and I see
Speaker 1: some of the contracts being traded, and you know, we
Speaker 1: hear the argument all the time that there might be
Speaker 1: a real economic reason, yes, why predict market should exist.
Speaker 1: So maybe you know, maybe you run a studio in Hollywood. Yeah, so,
Speaker 1: like it's actually really important who will be in the
Speaker 1: next cast of whatever Avengers Moving is coming out. But
Speaker 1: I have a hard time thinking that betting on whether
Speaker 1: or not Jesus Christ is going to return to the
Speaker 1: world is economically important, right.
Speaker 2: Yeah, No, I think there's a great point. I mean,
Speaker 2: I think you're being generous actually with the Avengers thing.
Speaker 2: I mean maybe maybe GOODRCT. But you know, for example,
Speaker 2: there is a market and it's actually you can track
Speaker 2: it on the Bloomberg that says on Kelshy will there
Speaker 2: be a recession before twenty twenty seven, and that is
Speaker 2: at thirty three percent right now, And that is something
Speaker 2: that like, it's amazing in a sense that there's an
Speaker 2: instrument where you could bet on this very important question
Speaker 2: to investors and express it very purely in a way
Speaker 2: that if you're using other instruments like stocks or bonds,
Speaker 2: you'd only be using a proxy for it. So the
Speaker 2: potential there, in my mind, for some of these things
Speaker 2: is obviously high.
Speaker 1: What you could say, certainly in our current economic environment,
Speaker 1: being able to bet on things like is the US
Speaker 1: going to strike carc Island or something like that could
Speaker 1: be actually useful if you are a large institutional investor
Speaker 1: versus just betting on the price of oil or the
Speaker 1: direction of exactly or something like that. However, I have
Speaker 1: a hard time thinking that institutional investors are going to
Speaker 1: flock to a platform that contains questions that are both
Speaker 1: is there going to be a recession and also some
Speaker 1: completely out there pop culture kind of contract.
Speaker 2: Totally or you know, obviously beyond the pop culture, they're
Speaker 2: dominated by sports betting and so forth, So that's another question. Also,
Speaker 2: you know, the marketing tactics used by the major prediction
Speaker 2: market companies are very different than anything, pretty different than
Speaker 2: anything we see in traditional futures, et cetera. So I
Speaker 2: think we both Yeah, Like I do want to fully
Speaker 2: think that, like there could be legitimate use cases where
Speaker 2: their natural heads, natural liquidity providers for some of these,
Speaker 2: like SWAB some of these pure binary instruments, et cetera.
Speaker 2: But there are some pretty big chicken and egg problems
Speaker 2: and other things to like actually get there where there's
Speaker 2: a volume. You know, for example, some of the weather
Speaker 2: related ones, Absolutely they're great, No one's better. You know,
Speaker 2: there's like twenty thousand dollars on some of that that's
Speaker 2: beneath any order of magnitude of usefulness to any economic
Speaker 2: or real specutive actor.
Speaker 1: That's right. No hedge fund gets out of bed for
Speaker 1: less than twenty thousand. Okay, So I do, in fact
Speaker 1: have the perfect guest to discuss all of this someone
Speaker 1: who is trying to solve that chicken and egg problem
Speaker 1: and actually create a prediction market that is more geared
Speaker 1: towards institutional investors. And we are going to be speaking
Speaker 1: with Thomas Petrofe. He is, of course the founder and
Speaker 1: chairman of Interactive Markers, someone who's not just interesting from
Speaker 1: a prediction market perspective, by the way, but someone who
Speaker 1: has been incredibly influential in the development of markets globally. Absolutely,
Speaker 1: so we're going to get into the overall you know,
Speaker 1: market structure, AI, all that good stuff, but we'll start
Speaker 1: with prediction markets. So Tamas, thank you so much for
Speaker 1: coming on our thoughts.
Speaker 4: Thank you very much for having me.
Speaker 1: So when you think about prediction markets for institutional investors,
Speaker 1: in your mind, what is the actual differentiating factor between
Speaker 1: you know, a retail investor who maybe is playing around
Speaker 1: a little bit on something like Calshi or poly market
Speaker 1: versus someone with a lot of money who might be
Speaker 1: interested in trading in size.
Speaker 5: So from that point of view, the prediction market is
Speaker 5: no different than the stock market. Accepted address is much
Speaker 5: larger and more important on the one hand, on the
Speaker 5: other hand, much sillier and less important. Questions, So It
Speaker 5: all depends on why you ask. So the stock market
Speaker 5: has Microsoft and Nvidia and also has you know, the
Speaker 5: game Stop and other silly stocks, right, so it is
Speaker 5: a parallel situation. So you cannot blame prediction market the
Speaker 5: mechanism itself for the silly things that some platforms list.
Speaker 4: Right.
Speaker 5: The idea here is to deal with questions, to gather
Speaker 5: the consensus opinion of people who are preferably experts or
Speaker 5: are deep thinkers, and the questions that we're going to ask,
Speaker 5: and to gather their consensus so that we can all
Speaker 5: include that in our decision making and planning for the future.
Speaker 2: That was excellent, And first of all, I think that's
Speaker 2: a great point obviously that you know, the stock market
Speaker 2: contains both Microsoft and a video and it also includes
Speaker 2: game stock.
Speaker 1: Development. Yeah, when game Stop happened, we were all sort
Speaker 1: of in shock that people were treating a stock as Yeah,
Speaker 1: that's true.
Speaker 2: But you know, I paid for part of college trading
Speaker 2: penny stocks, et cetera, so I know that. And if
Speaker 2: you go back to you know.
Speaker 1: Penny stocks are the original just market.
Speaker 2: Go back to the Jesse Livermore era of true bucket shops,
Speaker 2: and it was like pretty messy, et cetera. So from
Speaker 2: your perspective right now, if we're talking about prediction markets
Speaker 2: in the US, you know, it's really heavily sports betting.
Speaker 2: Then there's some election stuff, and then there's some silly things,
Speaker 2: et cetera. First of all, let's zoom out for the
Speaker 2: big question. Do you think that eventually institutional investors will
Speaker 2: use prediction market like instruments to trade things like will
Speaker 2: there be a recession in the year twenty twenty six?
Speaker 2: Do you expect these to become big volume contracts at
Speaker 2: some point?
Speaker 5: Definitely, I'm absolutely convinced. So the stock market that gives
Speaker 5: us a venue to invest in the future, basically in
Speaker 5: the future of different companies, but you know, some of
Speaker 5: how those companies are actually going to end up faring
Speaker 5: in the future has a lot to do with the
Speaker 5: economic environment and social environment in the future, and basically
Speaker 5: we are left to our own devices to decipher what
Speaker 5: the future holds. So the prediction market gives them an
Speaker 5: opportunity to gather experts around who are not afraid to
Speaker 5: put their money on the line and express what they think,
Speaker 5: and to collect a consensus opinion so that we all
Speaker 5: know what we can possibly expect if it's probably a
Speaker 5: better guest than what we individually could come up with.
Speaker 1: So a lot of the prediction markets, one of the
Speaker 1: problems that they currently have is that volumes are still
Speaker 1: pretty low. Right, the markets are very i liquid. When
Speaker 1: you talk to institutional investors, you know, people you would
Speaker 1: like to be clients on your platform, which is called
Speaker 1: forecast trader. By the way, what are the big hurdles
Speaker 1: for them? Like, what are they what's stopping them from
Speaker 1: going all in on prediction markets at.
Speaker 5: The moment, Well, at this point, just it's very similar
Speaker 5: to any other market. Then it starts. Liquidity is always
Speaker 5: a big question, and it takes a long time to
Speaker 5: gather sufficient liquidity. If you look at, for example, the
Speaker 5: options markets that have been run off for fifty four years,
Speaker 5: I think initially there was very little liquidity and it
Speaker 5: was very difficult to trade more than say twenty or
Speaker 5: thirty contracts at the time. Nowadays you can trade thousands
Speaker 5: or maybe the millions of contracts. So it has developed
Speaker 5: over the past five decades really well. And the stock
Speaker 5: market is basically similar.
Speaker 2: What unlocked the liquidity was there a market design choice,
Speaker 2: Like if you go back and you're thinking about, Okay,
Speaker 2: the history of the options market, etc. Was it just
Speaker 2: time and existence or were there certain either regulatory or
Speaker 2: market structured decisions that had to be made that truly
Speaker 2: unlocked the opportunity to take it to the next level
Speaker 2: volume wise.
Speaker 5: Yeah, Well, I think over time people have become more
Speaker 5: familiar with the idea of what an option is, and
Speaker 5: it is a fairly complex idea or relative to what
Speaker 5: the prediction markets are. That's why we try to come
Speaker 5: up with something simpler than options, And as far as
Speaker 5: that is concerned, I think we have done that. So
Speaker 5: it is not going to be as complex for people
Speaker 5: to understand a prediction contract as it is to understand
Speaker 5: the options contract. So I think that it will not
Speaker 5: take equally long time to develop sufficient liquidity.
Speaker 1: So when I go on forecast Trader right now, I
Speaker 1: see bets like, you know, will the United States economy
Speaker 1: enter recession by the end of the second quarter of
Speaker 1: twenty twenty six, or will twenty twenty six be the
Speaker 1: warmest year on record, which, as we were talking about earlier,
Speaker 1: these are all things that I would say have economic
Speaker 1: implications when you compare what interactive brokers is doing versus
Speaker 1: say a calshie or a poly market. Is that how
Speaker 1: you're trying to differentiate yourself with more, you know, quote,
Speaker 1: serious economically serious contracts. Is that your edge?
Speaker 5: So don't forget that we are very different companies. Interactive
Speaker 5: Brokers has a large following of serious, successful institutional investors
Speaker 5: and serious investors who are managing ultiply large portfolios on
Speaker 5: our platform. Call she doesn't have that. So for us,
Speaker 5: prediction markets are in a dndom that enables us to
Speaker 5: basically run out our offering and our customers now have
Speaker 5: the ability to gauge such questions as a weather, a recession,
Speaker 5: but highlightlyation.
Speaker 4: Is going to be call. She has no.
Speaker 5: Investors basically other than investors in the prediction markets. So
Speaker 5: for them it's first of all, it is hard to
Speaker 5: maintain yourself only on up until it really takes off.
Speaker 5: It's hard to generate enough trading volume to make a profit,
Speaker 5: so they had to add things like sports, and of
Speaker 5: course that has become their mainstay and they are now
Speaker 5: very profitabout.
Speaker 4: You to sports.
Speaker 5: So if they didn't do sports, maybe they couldn't even
Speaker 5: support the platform.
Speaker 2: I don't know, but just to be clear, do you
Speaker 2: get the impression that from the perspective of this broad
Speaker 2: institutional world that's going to come to prediction markets, that
Speaker 2: one of your edges will be this focus that you're
Speaker 2: not a sports, that you're not in random pop culture,
Speaker 2: that this is going to be contracts that have the
Speaker 2: sort of quote serious investor in mind. Is that part
Speaker 2: of why you.
Speaker 4: Have ad this is by choice.
Speaker 5: We prefer to focus and concentrate on serious questions having
Speaker 5: to do with our clients' investments. Maybe some of them
Speaker 5: would like us to have sports, but we just don't
Speaker 5: want to distract them with that.
Speaker 1: Say more about that, So how are you actually choosing
Speaker 1: the contracts that you're presenting as options to investors?
Speaker 5: So we are choosing contracts that, in our minds have questions,
Speaker 5: the answers to which have serious economic consequences. So, for example,
Speaker 5: global warming, I think it's a huge question, maybe not
Speaker 5: this year, but ten twenty years from night certainly will be,
Speaker 5: or the rate of adoption of AI or I mean,
Speaker 5: you know, really significant questions that basically will determine how
Speaker 5: we live our lives ten to twenty years from now,
Speaker 5: and therefore it's important for us to have questions to
Speaker 5: those answers so that people that enter schools today, or
Speaker 5: decide to buy a house somewhere, or decide what profession
Speaker 5: they are going to study and develop into these sorts
Speaker 5: of questions deserved to have serious answers so.
Speaker 4: That that can be signed about to do it.
Speaker 2: IBKR, of the brokerage platforms that a retail ish person
Speaker 2: could access, always been like one of the most sophisticated
Speaker 2: in terms of the wide range of instruments that are available,
Speaker 2: from stocks to bonds to futures, et cetera. Is this
Speaker 2: the first time that you have a sort of your
Speaker 2: own market that you built on the platform, rather than
Speaker 2: IBKR simply being a window or a venue to trade
Speaker 2: on some other market. Is this new for you in
Speaker 2: a big way?
Speaker 5: It's never done anything as large as this, that is
Speaker 5: so different than what already existed. But as we are
Speaker 5: going along building out the platform over the last almost
Speaker 5: five decades, we certainly have always been on the edge
Speaker 5: of trying to bring in new things.
Speaker 2: Sure, but in terms of like, okay, like if I
Speaker 2: trade a share of Microsoft on IBKR, there are established
Speaker 2: exchanges that presumably that trade is going to be routed through,
Speaker 2: whereas with forecast trader. You are the market. You're the
Speaker 2: broker and the venue at the same time. And part
Speaker 2: of what's novel about prediction markets generally is this thing
Speaker 2: where the broker and the market venue are fusing in
Speaker 2: a way that has not been the case historically with say,
Speaker 2: CME futures. It's not been the same way with stocks.
Speaker 2: So from a market structure standpoint, is IBKR in a
Speaker 2: new position by the fact that it's essentially both the
Speaker 2: broker and the exchange for these instruments.
Speaker 5: You're probably correct in that although we have had in
Speaker 5: the past started several indexes and various futures contructs, but
Speaker 5: indexes and futures contruct different ones, but they already existed.
Speaker 5: So the prediction market as such is yes, it's you
Speaker 5: are correct, it's the first market where nothing has has
Speaker 5: existed like it.
Speaker 1: Actually. On that note, you know, I alluded to your
Speaker 1: history in the markets, very long history and formative history.
Speaker 1: But how come we didn't get prediction markets sooner? You know,
Speaker 1: like we could have been betting on global warming five
Speaker 1: or ten years ago, And it doesn't seem until I was.
Speaker 5: Reading about prediction we started developing the prediction markets roughly
Speaker 5: than years ago, and the problem was that we had
Speaker 5: some consultants at the firm that were doing some other
Speaker 5: work and they found out that we were working on
Speaker 5: prediction market and at that time we were trying to
Speaker 5: go for a banking license, and they said, well, you
Speaker 5: will never get your banking license if you come up
Speaker 5: with this prediction market as an aerofact. The SEC will
Speaker 5: not take kindly to it, and you will have all
Speaker 5: kinds of problems if you really do this. So what
Speaker 5: we did, we already had built the whole system. So
Speaker 5: what we did was we released it for phantom money,
Speaker 5: and people were playing around on it for phantom money,
Speaker 5: and that eventually petered out because pentom money is not
Speaker 5: really interesting. Yeah, and but it it took hold enough
Speaker 5: for the people who found that poly market and calls
Speaker 5: to see it and to play with it, and then
Speaker 5: they had a better idea and they went forward with it.
Speaker 5: And you know, she went to Masur went to the
Speaker 5: CFTC and got himself licensed. And I was really upset
Speaker 5: when I saw that. And then of course, you see,
Speaker 5: it was easy for him because they had nothing, so
Speaker 5: they had nothing to lose. You see the problem is
Speaker 5: that when you have when you have a flourishing business,
Speaker 5: it's very hard to do new things because the downside
Speaker 5: is so big for you. So even and then I
Speaker 5: wanted to buy Cauche, but he wouldn't They wouldn't entertain, say,
Speaker 5: they didn't even give.
Speaker 4: Me a price. So what year was that? Then? I? Sorry?
Speaker 2: What year was that that you were trying to buy?
Speaker 4: Oh? I think about five years ago?
Speaker 2: I was my next question?
Speaker 1: Why didn't you just buy Calshi at that point?
Speaker 5: Are So? Then I went to the CFTC and I
Speaker 5: asked for our own license and they took three years
Speaker 5: to work it through and give it to us, but
Speaker 5: we eventually got it last year.
Speaker 4: How actually we got it in twenty four, just before
Speaker 4: the elections.
Speaker 2: Well that's interesting. So I was just about to ask you, like,
Speaker 2: was it the election that enabled you to get into it?
Speaker 2: But it sounds like actually you would have been able
Speaker 2: to get into the space even without the change in administration.
Speaker 5: Well, look, I mean, we are in a very lucky circumstances.
Speaker 5: We have a flourishing, profitable business, so we can support
Speaker 5: this crazy addiction to develop the prediction market that is
Speaker 5: basically a lost leader, and we are very sure that
Speaker 5: eventually it will be very profitable.
Speaker 2: I'm just one other quick market structure ish question. Are
Speaker 2: you going to provide leverage? How does that work for
Speaker 2: these instruments?
Speaker 5: For reorking on that right now? Up TONI it's been
Speaker 5: a very easy situation because of it. You see, a
Speaker 5: broker always has to worry about providing leverage. So most
Speaker 5: brokerage firms when they go bust because of the leverage
Speaker 5: they provide.
Speaker 4: And if you look at.
Speaker 5: The Big Walls three crisis, they all have to do
Speaker 5: with leverage always so. But eventually we will have to
Speaker 5: provide leverage. The question is how do you track structure?
Speaker 5: And that is going to be I'm sure there'll be
Speaker 5: some firms that will go bust on leverage in prediction markets.
Speaker 4: Yes, do you.
Speaker 1: See a world where I guess prediction market prices kind
Speaker 1: of kind of become standard reference data, like the same
Speaker 1: way we look up credit spreads or something.
Speaker 4: Yeah. Absolutely, yeah, certainly, certainly.
Speaker 5: You know right now you're saying that is they say
Speaker 5: the fat going to cut reads or not? I mean, yeah,
Speaker 5: people are consulting economies and say that's that's what the
Speaker 5: consensus is, opinion is, But it's not as clear as
Speaker 5: just look at the clean probability.
Speaker 4: That the prediction market provides, just.
Speaker 5: One plane number to see what the probability is that.
Speaker 1: Wait, why is it not as clear? Because I can
Speaker 1: go I can go to the bond market and back
Speaker 1: out what the bond market thinks about future Fed moves,
Speaker 1: and that's a huge market. Why would you need the
Speaker 1: prediction market to do that?
Speaker 5: Well, no, you can go to the fat funds markets. Yeah,
Speaker 5: not the bond markets. Okay, you can go to the
Speaker 5: fat funds. That's that, that is true. But that's another
Speaker 5: interesting thing. So fat onund's markets existed for a long time,
Speaker 5: and it only recently that people really consult the fat
Speaker 5: fund markets when they are wondering about trades and no
Speaker 5: longer talk to the economists because just two years ago
Speaker 5: people kept talking about what which economists says about?
Speaker 2: Right, one day, We're never going to have to consult
Speaker 2: in economists again. That's like, that's the triggers dream.
Speaker 1: World prediction market.
Speaker 4: I think you see.
Speaker 5: I think that what will happen is that economists will
Speaker 5: begin to participate in the prediction markets, and instead of
Speaker 5: issuing their predictions, they will trade their own positions, and
Speaker 5: good ones will make a lot of money and bad
Speaker 5: ones we lose.
Speaker 2: But can we be just among the three of us here?
Speaker 2: No one else is just among the three of us
Speaker 2: here for a second. Like traders, you guys really don't
Speaker 2: like economists, do you?
Speaker 5: Like?
Speaker 2: You hold you do not hold them in particularly high esteem? Right, Like,
Speaker 2: let's be honest, it's just the three of us chatting here.
Speaker 5: Well, for a trader and economist is very confusing because
Speaker 5: it depends on which one you talk to.
Speaker 4: Right.
Speaker 5: The prediction markets cure that deficiency.
Speaker 2: Right yeah, So right now, you could go to robin
Speaker 2: Hood and you could trade markets on you could trade
Speaker 2: Kelsy markets via Robinhood, and we have the CEO of
Speaker 2: Robinhood on Flatteneve, and they also might be building their
Speaker 2: own prediction markets venue. Is there ever a scenario in
Speaker 2: which ib kr both has a its own prediction markets
Speaker 2: but is also a broke that would allow a user
Speaker 2: I could like trade futures via my ibk our account.
Speaker 4: Absolutely. So.
Speaker 5: We are coming out at the end of May with
Speaker 5: a consolidated feed where contracts that exist on cellular platforms
Speaker 5: we will have consolidated so that when somebody comes to
Speaker 5: us interactive brokers to look at the market. We will
Speaker 5: give them the consolidated feed just like we do on
Speaker 5: stocks there. Yeah, trade on I don't know, Tony or
Speaker 5: so markets and we always have the best feed on
Speaker 5: offer and we always provide best executions based on all
Speaker 5: the possible venues that stop trades, and we will do
Speaker 5: the same thing on prediction markets.
Speaker 2: That makes a lot of sense. That analogy of like
Speaker 2: best execution the one issue that I could see arising
Speaker 2: and I'm curious your thoughts. Like a share of micro
Speaker 2: Soft is a share of Microsoft, regardless of whatever. However
Speaker 2: number of exchanges it trades on. A bet on a
Speaker 2: US recession could be different depend because then it gets
Speaker 2: down to contract specifications, and how Kelshi defines when a
Speaker 2: recession is triggered could be different than how a different
Speaker 2: platform defines the same thing. So how much of this
Speaker 2: is going in terms of the future of the industry
Speaker 2: is going to depend on a certain degree of alignment
Speaker 2: among platformsity Well, yeah, fungibility to line across contract specifications
Speaker 2: and is the work being done on that.
Speaker 5: So fund ability is a great issue, and it is
Speaker 5: in the interest of the market participants to create as
Speaker 5: much french ability as possible. So accordingly, we are going
Speaker 5: to structure our contracts to be identical.
Speaker 4: Okay, whenever it's possible.
Speaker 1: That's interru Can we go back to making fun of
Speaker 1: economists for one second, but you know, you made the
Speaker 1: point that when you're talking to economists, it depends on
Speaker 1: whether you're talking to a good one. And part of
Speaker 1: the whole idea of prediction markets is you incentivize people
Speaker 1: with good information to express their opinions in exchange for money. Recently,
Speaker 1: there's been the issue of I don't even want to
Speaker 1: say insider trading or insider information, because I don't know
Speaker 1: what constitutes insider trading or insider information in the prediction market.
Speaker 1: But there's been a sense that we've had a few
Speaker 1: political developments and there have been big trades on prediction
Speaker 1: markets ahead of some of those. Maybe someone knows something
Speaker 1: ahead of time and they're betting on it. I don't
Speaker 1: know if that's wrong per se or illegal per se.
Speaker 1: But when you talk to institutional clients, how concerned are
Speaker 1: they about the perception of insider trading on these platforms?
Speaker 4: So inside their trading has always in an issue.
Speaker 5: I mean, early on, when I started my career, I
Speaker 5: lost have my initial capital based on insider trade, So
Speaker 5: I'm extremely familiar with with the damage it can cause.
Speaker 5: But on the other hand, and in spite of that,
Speaker 5: I'm in favor of not having any rules against insider trading.
Speaker 5: I would like all the information out there as soon
Speaker 5: as it's available, because look, as a society, we're better
Speaker 5: off knowing as soon as possible anything that is noble, right,
Speaker 5: So why do we have to wait several First of all,
Speaker 5: when you face with a merger or acquisition situation where
Speaker 5: most of the insider trading is happening, right, the secretary
Speaker 5: is the lawyers. Everybody knows about it. They go home,
Speaker 5: they tell they buns day. So it eventually always filters out.
Speaker 5: So it's almost impossible to avoid. It's very very difficult
Speaker 5: and con versome. Why don't we just do away with
Speaker 5: it and let the information come out as soon as possible.
Speaker 2: So, just to be clear, when you say this, you're
Speaker 2: talking about all markets here, not just predictionable. Okay, So
Speaker 2: even in the cyber the counter one counter argument I can.
Speaker 1: Think of a couple how many, but one counter.
Speaker 2: Argument would be liquid capital markets are a very good
Speaker 2: thing for the economy, And why would I ever want
Speaker 2: to participate in a capital market if it's known that
Speaker 2: there are going to be sharks et cetera that are
Speaker 2: just like if such an information edge that I could
Speaker 2: never win.
Speaker 5: And so yes, you see there are sharks right now.
Speaker 5: But if they if they're if inside their information just
Speaker 5: came out as soon as possible, there would be very
Speaker 5: little opportunity for the sharks to be around, because you
Speaker 5: could be a shark for a second or two, but
Speaker 5: that's it. Nowadays sharks can be around for weeks and months.
Speaker 2: Another argument would be that from a corporate perspective, I
Speaker 2: don't want all my secrets to be monetizable so easily.
Speaker 2: So like I want to be able to share information
Speaker 2: with a group of people inside and not have to
Speaker 2: worry them.
Speaker 5: Protect them yourself, don't rely on national laws to protect you,
Speaker 5: I mean, protect them yourself.
Speaker 2: I'll just stop talking to them.
Speaker 1: Yeah, wait, I want to hear more about you mentioned
Speaker 1: that you lost a bunch of money, Yeah, your capital
Speaker 1: from insider trading. Yeah, what's that about?
Speaker 5: So when I bought my seat on the American Stock
Speaker 5: Exchange is an optionist there in nineteen seven seven and
Speaker 5: I had two hundred thousand dollars of safe capital that
Speaker 5: I started my option trading business with on the floor
Speaker 5: of the American Stock Exchange. And maybe a year or
Speaker 5: so later, I was standing in Dupon, and in those days,
Speaker 5: options were trading in sixteens and eights, and it was
Speaker 5: a day before expiration, and there was a very cheap
Speaker 5: out of the money call that was to be expired
Speaker 5: the next day, and somebody came in and in according
Speaker 5: to my fair value sheets that I only I had
Speaker 5: in those states, because I had my own options formula
Speaker 5: and I generated these sheets for myself, that option was
Speaker 5: worth about twenty five twenty six dollars, and somebody came
Speaker 5: in and offered it at three eighths, which is eighteen dollars.
Speaker 5: Offered to me three hundred of those options at eighteen dollars,
Speaker 5: and I bought all three hundred, which was at that
Speaker 5: time the biggest trade I've ever done. And just as
Speaker 5: the broker walks on, another broker walks in and he says,
Speaker 5: where can I buy five hundred of these?
Speaker 4: And nobody said anything. Everybody was stunned.
Speaker 5: And I said three eighths, and he said, okay, many
Speaker 5: I said five hundred. I was so overwhelmed by the
Speaker 5: month of profit. I was suddenly making a five period
Speaker 5: of time that I gave up all quations and I
Speaker 5: sold him the five hundred, So I was, as a
Speaker 5: result two hundred short. And then in the next several
Speaker 5: minutes the stock halted trading, and half an hour later
Speaker 5: it reopened with the news that DuPont had a fantastic
Speaker 5: quota and they were split. Think the stock three to
Speaker 5: three four one, and it opened way way up. So
Speaker 5: the option I saw two hundred of net for three
Speaker 5: eighths opened at four and a half dollars.
Speaker 1: I can see why you would be traumatized by insider trading.
Speaker 5: And yet I was really traumatized. I lost ninety dollars
Speaker 5: and it was horrible. But I still say to you
Speaker 5: that I think the best thing we could do about
Speaker 5: inside information is just to get the news out there
Speaker 5: as fast as possible and forget about persecuting people.
Speaker 1: I love that idea. Also, that you had your own
Speaker 1: fair value sheets, which you know, I presume those were
Speaker 1: sheets that were actually written down at that time in.
Speaker 4: Your posts, they were computer generated.
Speaker 5: I had a computer at home, and I had developed
Speaker 5: my own option formula in well much earlier in nineteen
Speaker 5: seventy and you.
Speaker 1: Were carrying them around on pieces of paper on the floor.
Speaker 4: Yeah, I had hold it up in all my buckets.
Speaker 1: Well, okay, so on this note, I mean you were
Speaker 1: one of the earliest people to automate market making. That's
Speaker 1: what you're famous for. And you've been through the whole
Speaker 1: transition from humans actually trading on the floor to everything
Speaker 1: being automated nowadays. Obviously, AI is this huge thing in
Speaker 1: the market in our lives right now. When you look
Speaker 1: at AI and compare it to the early days of
Speaker 1: electronic trading, what's similar and what feels different to you now?
Speaker 1: Is this just another technological improvement, another wave of you know,
Speaker 1: productivity enhancing tech or is this something fundamentally new in
Speaker 1: your mind?
Speaker 5: Well, it's a huge leap in technological developments, but it's
Speaker 5: basically As a computer programmer, I look at it basically
Speaker 5: as a new higher level language that is much much, much,
Speaker 5: much more powerful than anything that came before, but qualitatively
Speaker 5: is not different than the way we went from machine
Speaker 5: language to assembler language to fort Run and Cobol and
Speaker 5: eventually C and all the other languages. So this is
Speaker 5: a natural language. So AI is basically a higher level language,
Speaker 5: which is a natural language, and it also has to
Speaker 5: it available all the data that exists in the world,
Speaker 5: so that's why it is so immensely powerful. But as
Speaker 5: far as trading is concerned, basically automated trading has existed
Speaker 5: for a long time. We have started our first automated
Speaker 5: trading systems in nineteen eighty three and continued developing that
Speaker 5: ever since. And then eventually when other traders came in
Speaker 5: and both out the or their flow from brokerage firms,
Speaker 5: we didn't think that we should do that, so then
Speaker 5: we went out of the market making business. But up
Speaker 5: to that point, we were the largest market makers in
Speaker 5: the world.
Speaker 2: God, as I have so many questions, actually, can we
Speaker 2: just go back real quickly to the options pricing model
Speaker 2: that you have. It's funny, this is the second time
Speaker 2: in a few weeks someone was telling me about and
Speaker 2: I've been in a conversation about options trading in the
Speaker 2: early days. What were you programming that in what language?
Speaker 2: And was it the kind of thing where like you
Speaker 2: would leave the computers running overnight and then you like
Speaker 2: come back in the morning and after Nah, Because that
Speaker 2: tell us about like the technology that enabled you to
Speaker 2: determine fair market you have options.
Speaker 5: Back then, So I had an Olivetti computer at home,
Speaker 5: a desktop Olivetti desktop computer at home, and when I
Speaker 5: started to think about options, I started to run a
Speaker 5: lot of simulations and see at what prices.
Speaker 4: I would break even.
Speaker 5: And then eventually they rowed the idea of a probability
Speaker 5: distribution curve based on which I would determine the prices
Speaker 5: of options that after selling to myself many options, I
Speaker 5: would break even at which price And that's how I
Speaker 5: determined but the correct value for an option is and
Speaker 5: that eventually that turned into a formula and code.
Speaker 4: So I used that computer.
Speaker 5: And if you go to Interactive Brokers today, there is
Speaker 5: something we core probability lab where we can we can
Speaker 5: display where we do display the probability is the associated
Speaker 5: with the future price changes of any start.
Speaker 4: Oh yeah, we derive from the.
Speaker 5: Existing option prices. So you can see that there and
Speaker 5: you can basically learn about options.
Speaker 2: I never saw this page before, but this makes a
Speaker 2: lot of sense to me, and I've always been a
Speaker 2: little bit surprised that you don't hear more about translating
Speaker 2: option math into sort of normal intuitive odds. Because it
Speaker 2: seems like a very normal thing. One other question, you know,
Speaker 2: you mentioned AI as being like a new the next
Speaker 2: iteration maybe the last iteration, because it's natural language of
Speaker 2: computer programming. But most computer programming is like it's deterministic. Right,
Speaker 2: So if you write a line of code, it will
Speaker 2: do the same thing every single time. There's some rule
Speaker 2: and it will always be the same. You put in
Speaker 2: the same query into chad GPT, you will not always
Speaker 2: get the same output. In fact, frequently you won't even
Speaker 2: with the exact same query anything. When you're thinking about
Speaker 2: applications of AI within finance, et cetera, does the non
Speaker 2: deterministic element of.
Speaker 5: AI proabilistic language, right, That's why it is not always
Speaker 5: the same.
Speaker 4: It's probabilistic, it's not deterministic. Right.
Speaker 2: Does that have implications for its use in finance?
Speaker 4: Well?
Speaker 5: Option prices are probabilistic. Prediction markets are probabilistic. That's what
Speaker 5: my initial impetus was for prediction markets to teach people probabilities,
Speaker 5: because people tend to not think probabilistically. They tend to think, well,
Speaker 5: either this will happen or will not happen, and that
Speaker 5: somebody knows and that's not how it is there is,
Speaker 5: there's a probability for something to happen, and nobody knows
Speaker 5: what really will happen.
Speaker 1: Right, do you know how to code in Cobyl?
Speaker 5: In Cobyl, I can well Gobel, I cannot. I can
Speaker 5: code in fourth run or four or basic or see
Speaker 5: number of language.
Speaker 1: You know, you could be making a lot of money
Speaker 1: fixing old mainframe systems and integrating them. Have you considered
Speaker 1: doing that?
Speaker 4: Yeah?
Speaker 2: Just going back sort of full circle to the prediction markets.
Speaker 2: I basically you know probably right one day they'll be big.
Speaker 2: What's the time frame? Do you have like a testable theory?
Speaker 2: Can you give us a number for how big you
Speaker 2: think they'll be? You know, we don't want to treat
Speaker 2: you like some economists who just makes a forecast that
Speaker 2: could ever be tested or whatever. We want something hard,
Speaker 2: So like, can you give us, like, you know, end
Speaker 2: of twenty twenty seven? Do you have like a end
Speaker 2: of twenty twenty six? How big will they be? So
Speaker 2: that we could come back and we could say, was
Speaker 2: Thomas correct about how big this space is.
Speaker 5: Going to be? Now? Well?
Speaker 4: That is.
Speaker 5: I don't think that is a good way too too.
Speaker 5: I mean, I'm all based on and event. Then I
Speaker 5: read these projections from consulting firms about how big some
Speaker 5: something will be.
Speaker 4: Yeah, in the years ahead of time.
Speaker 5: I have no idea how to evaluate that, but all
Speaker 5: I think, all I know is that it's going to
Speaker 5: be very, very big because it's extremely useful and it's
Speaker 5: a it's a very simple way for all of us
Speaker 5: to direct our decision making a prediction market and to
Speaker 5: hedge our decision making.
Speaker 2: I I was just going to say, Tracy, I noticed
Speaker 2: one of the contracts that they have on ibkr is
Speaker 2: will use sla IS out of state tuition exceed fifty
Speaker 2: three thousand dollars in twenty twenty six. As someone who
Speaker 2: has children who like in the next decade are going
Speaker 2: to go to college, like this could be a very
Speaker 2: useful thing for me to hedge at some point. Like
Speaker 2: my daughter heard that there's a good theater school UCLA.
Speaker 2: She said, I heard there's a good theater school at
Speaker 2: University of Michigan, and so I have to start thinking about,
Speaker 2: like University of Michigan out of state tuition.
Speaker 1: Kids these days are very focused, but this could.
Speaker 2: Be a very useful instrument for me.
Speaker 5: Absolutely, college tuitions have been there thinking about listing them at.
Speaker 4: Can I ask you.
Speaker 1: A conceptual question, which is like, if prediction markets really
Speaker 1: take off, and we have more and more money that
Speaker 1: is being placed on whether or not the actual event
Speaker 1: itself happens, what does that mean for capital markets? Because
Speaker 1: I think about capital markets. You know, everyone in finance
Speaker 1: for years and years and years said this is about
Speaker 1: the efficient allocation of capital into productive industry. And one
Speaker 1: way of betting on the future of the US economy
Speaker 1: would be by buying US equities, and that money goes
Speaker 1: into companies and it creates jobs and a feedback and
Speaker 1: all of that. If I'm just betting on the actual outcome,
Speaker 1: what does it mean for actually funding economic activity?
Speaker 5: So the money you put at risk, but the money
Speaker 5: is not laying around, the broker will take that money
Speaker 5: and put it into treasury bills. Right, So, as you know,
Speaker 5: there is an awful lot of money that is in
Speaker 5: treasury bils and that's financing our deficit, and so that's
Speaker 5: where your money will be employed.
Speaker 2: From a regulatory standpoint, is there anything right now that
Speaker 2: you think the CFTC could or should be doing to
Speaker 2: further to further along this market.
Speaker 5: No, I think the big regulatory problem is that there
Speaker 5: are many questions concerning specific companies that we would love
Speaker 5: to ask, but we do not know if the question
Speaker 5: would be a security or a commodity, and do not
Speaker 5: know who should properly regulate it, and therefore we don't
Speaker 5: ask these questions. But it would be extremely useful for
Speaker 5: us to be able to ask about, you know, the
Speaker 5: future developments Nvideo or Microsoft or Google.
Speaker 2: Or this could be like contracts either related to will
Speaker 2: they beat or miss the earnings estimates? It could be
Speaker 2: contracts related to when.
Speaker 5: Will they the number of employees they you have, or
Speaker 5: they average salary that I will have, or et cetera.
Speaker 5: But the problem is that the price of Google is
Speaker 5: a security. You know that the price of the shares
Speaker 5: our securities. So the legislation says that anything, any anything
Speaker 5: that has an impact on the stock price would be
Speaker 5: on the financial statement would be a security. So there's
Speaker 5: a lot of stuff that has an impact on the
Speaker 5: financial statement, but nobody is listing it in any way.
Speaker 5: So if this quagmire would have to be cleaned up
Speaker 5: and then we will have a much better market.
Speaker 2: It sounds like we need to merge the sec and
Speaker 2: the CFTC.
Speaker 4: That would be.
Speaker 1: Great, all right, Timos Putterfee, thank you so much for
Speaker 1: coming on odd Laws. Really appreciate it.
Speaker 4: Thank you very much.
Speaker 1: Joe, that was an interesting conversation.
Speaker 2: That was great. I was not expecting Thomas to be
Speaker 2: I don't you know, maybe guy should have. But it's
Speaker 2: interesting to hear him completely just say let's get rid
Speaker 2: of insider trading laws.
Speaker 1: Yeah, clearly that was a formative experience for him, and
Speaker 1: perhaps he wants to be on the side of the
Speaker 1: people that made money in that transaction rather than the
Speaker 1: people that lost out. The other thing I thought was
Speaker 1: really interesting was the history with Calshi.
Speaker 2: Yeah, which I hadn't appreciated. Yeah, I think this is
Speaker 2: going to be like such an interesting space. It's a
Speaker 2: weird industry, I think prediction markets because it's an industry
Speaker 2: that basically is two companies right now, which barely counts
Speaker 2: as an industry. But we know from having talked to
Speaker 2: Vlawed at Robinhood, they're going to like build their own
Speaker 2: and then now obviously IBKR is you know, has its own.
Speaker 2: There's a few interesting questions, but one is like where
Speaker 2: is the value going to accrue? Is it going to
Speaker 2: be like the venue where the trading is, is it
Speaker 2: going to be who has the distribution? Because obviously Robin
Speaker 2: Hood and ibukre of incredible distribution via the fact that
Speaker 2: lots of people do other trading on there, it still
Speaker 2: feels like very much a jump ball in terms of
Speaker 2: who makes the money in this totally.
Speaker 1: Well, the other thing that was interesting was the idea
Speaker 1: of creating standardized contract Yeah, yeah, you know, something more fungible.
Speaker 1: And then I wonder, well, if you do that, do
Speaker 1: you have to create like an ISDA type body that's
Speaker 1: gonna adjudicate on these things?
Speaker 4: Right?
Speaker 2: Yeah, No, that's that's gonna be like a huge question.
Speaker 2: My gut is that Tomas is right. Like if he
Speaker 2: is saying these are going to be a really big thing,
Speaker 2: and he's like, traders are gonna want to have these instruments,
Speaker 2: who am I to disagree? Like, I maybe like they
Speaker 2: won't be big for like random pop culture stuff, but
Speaker 2: are they going to be big for like recession things
Speaker 2: and stuff like that. If Thomas thinks so, then I
Speaker 2: think so that's what That's where I stand.
Speaker 1: It does feel like the steady march of progress is
Speaker 1: sort of in this direction, But progress progress, it feels inevitable.
Speaker 1: But also, I mean, it's hard not to he mentioned
Speaker 1: game stop, and it's hard not to think back to just,
Speaker 1: you know what, five years ago now when game stop happened.
Speaker 1: It was such a big story, precisely because it was
Speaker 1: such a departure from the way people had treated stock
Speaker 1: market previously.
Speaker 2: Yeah, but you know what, I agree completely, But I
Speaker 2: had a thought actually when he said that that which
Speaker 2: is you know for a long time, and there's the
Speaker 2: famous quote equities in Dallas, and it's like, yeah, there
Speaker 2: was a period not that long ago in American financial
Speaker 2: history where stocks themselves were not regarded as a particularly
Speaker 2: important market in and of themselves. Otherwise they wouldn't have
Speaker 2: talked about how the stock traders would have had to
Speaker 2: move out to Dallas. That's a phrase because the perception
Speaker 2: was that stocks weren't where the action is. And so
Speaker 2: it occurs to me, like, yes, when GameStop came out
Speaker 2: that it's like everyone was like clutching their pearls and
Speaker 2: scandalized that the market be included. It was like, oh,
Speaker 2: people are treating.
Speaker 1: You can call me a gramma. No, No, I know that's.
Speaker 2: Where No, seriously, like everyone was but like when you
Speaker 2: actually think about the big sweep of like stock market
Speaker 2: history in the United States, you know, maybe we shouldn't
Speaker 2: hold it up on such a pedestal. There's always been
Speaker 2: penny stocks, There's always been the pink chee. It's the
Speaker 2: buckets shops or whatever they called were there for a
Speaker 2: very long time. There was the curb market, where people
Speaker 2: were just trading. Like maybe the era in which the
Speaker 2: stock market is like this very serious thing, and like
Speaker 2: maybe that was Maybe that's kind of the exception, is.
Speaker 1: The theme of this conversation. Just give up basically, just.
Speaker 2: Like I'm just saying, like maybe maybe there's something to
Speaker 2: this idea. It's always all these markets have been a
Speaker 2: little bit of a there's been a there's been a
Speaker 2: I don't know what, what word are you gonna do?
Speaker 2: It's not CD but all entertaining I don't know, like
Speaker 2: embrace the CD. Yeah, something like that.
Speaker 1: Yeah, Okay, on that note, shall we leave it there?
Speaker 2: Let's leave it there?
Speaker 1: All right? This has been another episode at the Odd
Speaker 1: Loots podcast. I'm Tracy Alloway. You can follow me at
Speaker 1: Tracy All the Way.
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