Do you have an opinion on whether Cardi B performed at the Super Bowl? I mean, it's funny, but it's also kind of relevant because I saw someone has actually filed a complaint to the commission about Kalshi's decision specifically.
Well, of course, we're spending a lot of resources investigating whether Cardi B performed. Really, our focus here is on the market. So the unique thing, the great thing about the way that we regulate the markets is that the exchanges themselves, similar to on the security side, are self-regulatory organizations. So each exchange has its own rulebook that's been approved by the agency. It has its own requirements for contracts that are certified on the exchange. So of course, the Cardi B contracts went through a self-certification process and then they're settled in accordance with exchange rules. They go through a clearinghouse as well. So the exchanges each have these rulebooks and certain requirements around how the contracts are resolved and settled. And of course, now we're seeing some differences amongst Kalshi's rulebook and Polymarket's rulebook. But that's the great thing about our markets and having the ability to build a business, to develop an exchange with some flexible guardrails on top that the agency oversees. But we don't prescribe exactly what has to be in the rulebook. We have a principles-based system of regulation.
Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
Tracy, did you watch the Super Bowl?
You know, I was going to ask that and I knew it actually. I was going to start exactly the same way. I did watch the Super Bowl.
And so I feel empowered to ask you a very controversial question. Oh yeah, not which halftime show you watched, but did Cardi B perform at the Super Bowl?
Oh, right, because this was a big thing. I forgot that there was. You know what? I'm aware of various sort of questions about prediction markets and things that people place bets on. Well, how did that resolve? What was the basic issue here again?
So I think it's still being resolved in various ways. But, you know, Cardi B, she was on set during Bad Bunny's, you know, extravaganza and she was kind of like dancing and singing along, like mouthing words, at least along with other people like Pedro Pascal and Jessica Alba.
Lady Gaga. It was like singing together.
The only reason this matters at all is because of prediction markets. So there was a bet: will Cardi B perform? And now the question is, does standing on stage and kind of bobbing your head and mouthing words count as a performance? Polymarket says it does. Kalshi says it doesn't.
There you go. She and Polymarket split over whether Cardi B performed.
That's great. That's a great tension. I like that.
It is. It was striking to me, setting aside that I actually somehow seem to have missed the specific thing, like how much prediction markets are now just part of the consumption experience. You know, even you look at all these different things that people are talking about, there was, is Lady Gaga going to show up somehow, like someone made a bet on it before it went public. But also, just like with each score, you know, you check the line, it's like, how much did this move the expectations of whether the Seahawks are leading? Like prediction markets are truly becoming part of like pop culture and how we interact with pop culture.
There were some weird bets around like the color of Gatorade that was going to get dumped on the coach.
Yeah, length of like the national anthem being sung.
Did you see that? Like, I was tempted by some of those, but I stayed away. I'm still, I haven't used Polymarket or Kalshi probably.
You know, the interesting thing too is like how much the mood has swung, right? Because a few years ago, like, I don't know, 2022, 2023, I think we did an episode like, and at that time, like there was almost nothing. And the sort of like regulatory 180, the degree to the liberalization of these markets has been pretty remarkable. Even, you know, going back to a year and a half ago, there was just Polymarket and it was just the offshore version that you had to fund with stablecoins.
And now it's like exploded. At the time, you know, Kalshi was very limited. They didn't have U.S. access, etc., or very curtailed U.S. access. Anyway, they're here and everyone's trying to wrap their heads around where this is all going and stuff.
Yeah, it feels like they're much more sanctioned, I guess, than they used to be.
But that said, there are still some issues that people are trying to work out. You have ambiguous outcomes like did Cardi B actually perform? You have concerns around insider trading, although not insider trading per se, because we're not talking about securities contracts, but maybe people with insider info who inadvertently disclose something material. I was thinking about this actually, so you can also bet on which companies are going to run Super Bowl ads.
And a lot of people must know if a company is going to run an ad like that. You have like the agency actors, like everyone, and you could argue maybe that that's material non-public information, right? You run a Super Bowl ad, you get a bunch of attention, maybe your share price goes up if you're publicly listed.
Yeah, I don't know. There are so many things anyway, rather than just keep talking about them because we can talk for an hour.
We really do have the perfect guest. We're going to be speaking with Mike Selig. He is the new chairman of the CFTC, the main regulator for prediction markets. He's just sworn in in December. We're going to talk all about this, maybe some crypto as well. So, Mike, thank you so much for coming on Odd Lots, coming into the studio.
What do you tell us a little bit about just broadly coming into this new role? Like what are your goals here with the CFTC?
We're really at a pivotal moment. You mentioned prediction markets, crypto, AI, all manner of new technologies and products that are impacting our markets. And the CFTC was really this kind of a little known regulator before the financial crisis, regulated in the futures markets. It has expanded jurisdiction over the swaps markets, the over-the-counter derivatives markets. And now we see so much innovation in that space with things like prediction markets and crypto, with legislation on the verge of hopefully being on the president's desk. And so the agency is really at this unique moment where it has the opportunity to shape the future of these new and emerging markets. And it's a really exciting time to be in the seat.
Do you have an opinion on whether Cardi B performed at the Super Bowl? I mean, it's funny, but it's also kind of relevant because I saw someone has actually filed a complaint to the commission about Kalshi's decision specifically.
Well, of course, we're spending a lot of resources investigating whether Cardi B performed. Really, our focus here is on the market. So the unique thing, the great thing about the way that we regulate the markets is that the exchanges themselves, similar to on the security side, are self-regulatory organizations. So each exchange has its own rulebook that's been approved by the agency. It has its own requirements for contracts that are certified on the exchange. So of course, the Cardi B contracts went through a self-certification process and then they're settled in accordance with exchange rules. They go through a clearinghouse as well. So the exchanges each have these rulebooks and certain requirements around how the contracts are resolved and settled. And of course, now we're seeing some differences amongst Kalshi's rulebook and Polymarket's rulebook. But that's the great thing about our markets and having the ability to build a business, to develop an exchange with some flexible guardrails on top that the agency oversees. But we don't prescribe exactly what has to be in the rulebook. We have a principles-based system of regulation.
What is the basis for something like, is Cardi B going to perform at the Super Bowl halftime show? What is the basis for this being categorized as a true financial instrument regulated by the CFTC? Because it certainly just feels like problematic to me. Who has economic exposure? They need to hedge to Cardi B performing.
There's a really interesting historical story around the definition of commodity and the markets that we regulate today. Starting back in the thirties, when the Commodity Exchange Act was first ratified, it was originally focused on grain and over time we've had things like workbench come a long way.
It's come a very long way. Of course, with the financial crisis, we got all manner of new products within our authority. But the definition of commodities, extraordinarily broad. It includes virtually everything except a few things have been carved out, onions and motion picture box office receipts. And that's a really important point to note that they were expressly carved out. So most things in our commerce today, even securities are technically considered commodities under our act, and we have authority to regulate them. In the case of securities, we coordinate with the SEC and have some joint authority. But for all other types of products, services, REITs, indices, people are going to hedge that risk. They're going to be in the market to speculate on those products. And so we don't merit regulate. We don't tell people what they should be entering into contracts on. We create rules and regulations around those markets to make sure that they have integrity, that they're resilient, that they're vibrant and they have guardrails and investor protections. And so that's why going back to the exchange rulebooks and other controls, self-certification being an important process for making sure those markets are safe and secure. But we're not telling people whether to trade pork bellies or Cardi B contracts or anything else.
So let's go to the insider trading question, because this is sort of top of mind for a lot of people. Technically, it's not insider trading, but, you know, it does look like some people have inside knowledge sometimes when they put on big bets on something that just happens to happen the next day. The CFTC hasn't, as far as I know, given a lot of guidance on this issue. How are you actually thinking about it?
Well, from a legal standpoint, I think there's a bit of a misunderstanding about the insider trading doctrine at the CFTC. So the authority at the agency is very similar to the authority at the SEC under our anti-fraud, anti-manipulation rule. We do have authority to police insider trading in the commodities markets. Now the way that insider trading is carried out is oftentimes different from a situation where you have information asymmetries relevant to a company. But there are situations where you have informational asymmetries related to the markets, placing a trade ahead of a customer, for example, or even in this situation now with prediction markets. And that's something we are thinking about and certainly on the beat and exploring. So we surveil the markets, we collect data, we have information about, for example, you know, our players participating in these markets are people associated with the sports leagues, etc. And so we are a cop on the beat in that regard. So the doctrine's not entirely different, but there are some nuances that we are aware of and making sure that we're policing for.
Would Polymarket or Kalshi, in your view, be allowed to live stream a video of a giant roulette wheel and create futures trade? Let people trade futures on when it lands on red or black. Some of these types of gaming where it's really a game of chance and not a game of skill.
There's definitely a difference. And I think when we look at what's a commodity, it's possible that you could construct some sort of contract, an esoteric derivative, but really the underlying in a game of skill is very different. There's a clear economic risk associated, for example, at the Super Bowl. It's a good example. There's a ton of economic activity associated with that. There's hotel revenue that comes from it. There's vendors, there's activity within the city, tourism, all of that. And so there's a real reason to hedge that risk. With a game of chance, it's harder to say. It's possible you can attract something by it, but it's less likely that that's a real underlying.
Well, what is like the difference? Because, you know, let's say it's what is Bad Bunny's first song going to be at the Super Bowl. Like, what is the difference between that, which doesn't really seem any more economic than, you know, a roulette wheel and whatever it is?
Well, to be clear, there's no requirement in the act that there has to necessarily be some merit-based result from it, from a contract. I do think with a lot of these information markets, these prediction markets where they're forecasting a potential outcome in the future, they produce a lot of useful information. We are seeing newsrooms incorporate prediction markets. We're seeing sports live broadcasts incorporate prediction markets. We're seeing the information used in particular. A great example is the election in 2024 where the president had a very large victory and that was not necessarily forecast in many of the polls. But of course, the prediction markets got that right. So it's something that I think is valuable to society. The question of having regulation around, that's a separate question. I think that's an important one. We are certainly taking on that task and making sure that we don't let these markets languish or we don't push them offshore, but we develop the right rules and regulations to develop investor protections and make sure that the markets are flourishing here in the United States.
Since we're discussing prediction markets through the prism, through the medium of the Super Bowl. And you mentioned players as well, looking at player behavior. If a player were to place a bet on, I don't know, a specific play during the game and then they did it themselves, like something that they actually have agency over. Would that be something that you would investigate or look into?
You know, I think it's all facts and circumstances. So we'd evaluate potentially to the extent that there's insiders that are involved in the markets, we get that data. We're actually talking to a lot of the sports leagues. We're talking to participants in the markets to make sure that we are on top of things, have, you know, information about who is able to participate in these markets, who's not. We do have at the exchange level, the exchanges are really the first line of defense, and they are surveilling the markets. They're doing KYC on their customers. And so that's certainly something we're on top of and we'd consider and evaluate on a case-by-case basis.
Why isn't trading sports derivatives gambling or betting, or is it better?
Well, there really is an interesting history here. So if you go back to the thirties, National, you know, grain betting was a thing right then that was considered a national pastime. And so for as long as we've had derivatives markets, we've had these so-called bucket shops which were, you know, these off-exchange markets where people were just placing bets against the house on the future price of a commodity. On the other hand, you had organized exchanges. So the Chicago Board of Trade, later CME and others had organized markets with market integrity. They had derivative instruments, contracts where you actually were in a contract with another person. And then now in our markets, we have a clearinghouse innovating and standing in the middle of those contracts. But you have a buyer for every seller. With the kind of bookie model, that's not the case, or betting against the house. And there's a lot of different rules when you're betting in the house, you don't have the liquidity of being able to offset your position or sell a lot of your position. You're kind of stuck taking whatever the bookie's giving you, and some of the odds are very different. So you're actually based on the odds of the bookie as opposed to here where the contracts go up and down in value based on actual market activity. And so over time, the Supreme Court actually blocked some of this bucket shop activity by saying you can't take the price quotations from the organized exchanges and use them in a bucket shop. But a lot of these bucket shops over the years have now moved into gaming and other things. We're seeing really the same phenomenon where we have casinos and other operations that are operating lawfully under state requirements and regulations, but they don't have the same sorts of controls. You know, we regulate a nearly $500 trillion notional market with the swaps market. We have very stringent requirements and controls around our exchanges, and these contracts reflect that. They go through a very stringent process of self-certification. They can't be readily susceptible to manipulation. We surveil those markets, we police things like insider trading. And so it's a much more robust scheme on top of these markets, much higher stringent requirements. And so I do think we're seeing a lot of parallels between the thirties and forties and today. But rest assured that we're on top of these markets and these have the same sorts of investor protections that you would expect in the securities markets and in our futures markets.
Hmm. Out of curiosity, how much of your time is split now between the new stuff, prediction markets, crypto versus the, I guess, the old boring older exchanges?
Yeah, all very well. Our day-to-day is really the traditional markets. And when we talk about these new markets, many of the incumbents are getting into the space as well. We're seeing more and more of these products offered on our traditional DCMs. But all of these are the same registration category, right? There are some nuances in how they're set up. There's some new action relief that's been given to some of these platforms historically. But this is not, it's not, you know, our day-to-day bulk of work. That said, given that it's new and given that there's so much that is changing, we have a lot more rulemaking and policy work to do in this space. So I do think it's a big piece because of that. But in terms of the actual size of these markets compared to, as I said, that $500 trillion notional swaps market, $40 trillion notional futures markets, it's a smaller piece, but it's growing. And I think blockchain is going to really change in particular how some of these existing exchanges operate, how they settle transactions and so forth. And so it's a really exciting time to be in the seat.
So I get that there are some market structure differences between a futures exchange on sports versus the traditional horse sense, the odds and so forth. But from the perspective of the user or the person who's putting money on the line, like I think most people would say like economically they're very similar and they're getting more similar because we know that say like Kalshi and Polymarket, they're trying to get into, figure out how to do parlays and stuff. So like it's getting closer and closer and you know, people have a lot of concerns about sports gambling and the effect that that has on young people and so forth. Legalizing, you know, national legalization of these, it de facto lowers the age in a lot of states because in a lot of states, the legal age to gamble is 21, and the legal age to trade a future is like 18, I believe. Is this, is this, do you think that's good that we've de facto lowered the age to bet on sports?
Or again, we're not merit regulators. We don't pass judgment on kind of the age requirements in our securities markets and our derivatives markets. We have certain standards that have been upheld in these markets. People are betting on, you know, any number of assets.
Right, if you want. But that's overwhelmingly sports.
I mean, I think that said, you have the ability to make investments and trade options and all manner of securities, all manner of commodities. And so the rules are not different based on doing sports or this or that. You know, I think this term betting has been used and thrown about in our securities markets and our derivatives markets as well. So I don't think it necessarily means anything in particular. But the notion is that you're able to make decisions at 18 in our markets and we uphold that state by state. Some of the standards are set even higher. And that is not something that, you know, I have a particular opinion on. I think that's just the way.
When you say what do you mean in state by state, some of the standards?
Some of the states have flexibility in what they set up for drinking or for, you know, gambling. And they're like, this is financial market activity. These are not wagers. You're not betting against the house. We have significant overlay from a regulatory standpoint over these markets. And so we're not gatekeeping particular categories of market selections or sports and having different standards. That's not how we've typically done things. And so we don't intend to do that in this particular market.
So you're not a merit-based regulator, but you are a technical regulator. And as we've been discussing, there's a lot going on, lots of rulemaking to do, lots of potential enforcement actions. There's a Barron's story out today talking about how the CFTC apparently has no enforcement officers left in its Chicago office. And you used to have 20, but everyone resigned, it seems. How are you balancing all these new markets, which are growing really, really fast and pose some very thorny questions that we've been discussing with more limited resources?
Well, look, a lot of the folks that left, that was before my tenure and certainly, you know, I'm not blaming you. It's not, you know, they didn't leave right after I joined it. But no, I think it's a serious question, right? We've got to make sure that we have adequate staff to police the markets. And we do have a ton of staff throughout the country. And, you know, to the point of our Chicago office, of course, it's important that we have folks within that office. But we don't have a Texas office. We don't have a Florida office. We don't have offices in every state. We have a handful of offices. We've got a critical mass in D.C. and a number of folks in New York as well. And those are our two largest offices. We continue to fill those out and we would love to have more people in Chicago. And, you know, the door is always open for folks that want to come in and work for us. And we continue to build out the ranks there. But we have adequate resources. We have a ton of folks within each of our offices, and we're actually leveraging a lot of the new technologies like AI to make sure that we're surveilling the markets and that we're reviewing things like insider trading and bringing cases where it makes sense. We're also processing applications very quickly. We just processed, I think, in a record time of 200 days, one of the more recent exchange applications. So we're really well-staffed, but we're continuing to build that out and make sure that we have good people in the building who are competent and able to make sure that we protect our markets.
