Hey there Oddlots listeners, Joe and I are very excited to announce that we will be hosting a live show in London on Thursday, May 7th. Yep, that's right. We've never been to London before. Well, we've been to London before, but in other capacities, we've never done a public episode, a public show in London. We've done them in other cities, New York City, DC, Chicago, San Francisco, and so forth. This will be our first London one, and I'm really excited about it.
Very exciting. So, if you want to hear some fantastic conversations being recorded live on stage, if you want to hang out with Joe and me, or if you want to hang out with other Oddlots listeners, you should definitely save the date for your calendar. It's going to be at Wilton's Music Hall in East London, again on Thursday, May 7th, doors opening at 6:00 p.m. And the key thing is, you know, every time we do a live show and they sell out, people complain like, 'Oh, I didn't see the link. I wish I would have bought them sooner.' We're going to be putting the link in the Oddlots newsletter. So, go find the Oddlots newsletter, just search for subscribe to it, and the link will be there before it's anywhere else. So, this is your chance. Plus, if you like Oddlots, if you're listening to the podcast, you probably really like the newsletter. You should really subscribe anyway. So, if you like the podcast and so forth, subscribe to the newsletter, get the newsletter, and get first crack at tickets. Hope to see you there.
Hello and welcome to another episode of the Oddlots podcast. I'm Tracy Alloway.
And I'm Joe Weisenthal. Joe, sometimes I go on prediction markets and I see some of the contracts being traded, and you know, we hear the argument all the time that there might be a real economic reason why prediction markets should exist. So, maybe, you know, maybe you run a studio in Hollywood. And so, like, it's actually really important who will be in the next cast of whatever Avengers movie is coming out. But I have a hard time thinking that betting on whether or not Jesus Christ is going to return to the world is economically important, right?
Yeah. No, I think this is a great point. I mean, I think you're being generous actually with the Avengers thing. I mean, maybe. But you know, for example, there is a market and it's actually you can track it on the Bloomberg that says on Kalshi, will there be a recession before 2027? And that is at 33% right now. And that is something that like that's amazing in a sense that there is an instrument where you could bet on this very important question to investors and express it very purely in a way that if you were using other instruments like stocks or bonds, you'd only be using a proxy for it. But so, the potential there in my mind for some of these things is obviously quite high. Well, you could say certainly in our current economic environment, being able to bet on things like is the US going to strike Karg Island or something like that could be actually useful if you are a large institutional investor versus just betting on the price of oil or the direction of stocks or something like that. However, I have a hard time thinking that institutional investors are going to flock to a platform that contains questions that are both is there going to be a recession and also some completely out there pop culture kind of contract.
Totally. Or, you know, obviously beyond the pop culture, they're dominated by sports betting and so forth. So, that's another question. Also, you know, the marketing tactics used by the major prediction market companies are very different than anything pretty different than anything we see in traditional futures, etc. So, I think we both like I do on a fully think that like there could be legitimate use cases where there are natural hedgers, natural liquidity providers for some of these like swap some of these pure binary instruments, etc. But there are some pretty big chicken and egg problems and other things to like actually get there where there's volume. You know, for example, some of the weather related ones. They're great. No one's betting, you know, there's like $20,000 on some of them. That's beneath any order of magnitude of usefulness to any economic or real speculative actor. That's right. No hedge fund gets out of bed for less than 20,000. Okay. So, I do in fact have the perfect guest to discuss all of this. Someone who is trying to solve that chicken and egg problem and actually create a prediction market that is more geared towards institutional investors. And we are going to be speaking with Thomas Peterffy. He is, of course, the founder and chairman of Interactive Brokers. Someone who's not just interesting from a prediction market perspective, by the way, but someone who has been incredibly influential in the development of markets globally. Absolutely. So, we're going to get into the overall, you know, market structure, AI, all that good stuff. But we'll start with prediction markets. So, Thomas, thank you so much for coming on Oddlots.
Thank you very much for having me.
So, when you think about prediction markets for institutional investors, in your mind, what is the actual differentiating factor between, you know, a retail investor who maybe is playing around a little bit on something like Kalshi or Polymarket versus someone with a lot of money who might be interested in trading in size?
So, from that point of view, the prediction market is no different than the stock market except it addresses much larger and more important on the one hand, on the other hand, much sillier and less important questions. So, it all depends on what you ask. So, the stock market has Microsoft and Nvidia, and also has, you know, the GameStop and other silly stocks, right? So, it is a parallel situation. So, you cannot blame prediction market, the mechanism itself for the silly things that some platforms list, right? The idea here is to deal with questions, to gather the consensus opinion of people who are preferably experts or are deep thinkers on the questions that we're going to ask, and to gather their consensus so that we can all include that in our decision-making and planning for the future.
That was excellent. And first of all, I think that's a great point, obviously, that, you know, the stock market contains both Microsoft and Nvidia, and it also includes GameStop and market stocks. Yeah, yeah. Like when GameStop happened, we were all sort of in shock that people were treating a stock as a token. That's true. But, you know, I paid for part of college trading penny stocks, etc. So, I know that. And if you go back to, you know, to the Jesse Livermore era of true bucket shops, and it was like pretty messy, etc. So, from your perspective, right now, if we're talking about prediction markets in the US, you know, it's really heavily sports betting. Then there's some election stuff, and then there's some silly things, etc. First of all, let's zoom out for the big question. Do you think that eventually institutional investors will use prediction market-like instruments to trade things like will there be a recession in the year 2026? And do you expect that these to become big volume contracts at some point?
Definitely. I'm absolutely convinced. So, the stock market gives us a venue to invest in the future, basically in the future of different companies, but, you know, some of how those companies are actually going to end up faring in the future has a lot to do with the economic environment and social environment in the future. And basically, we are left to our own devices to decipher what the future holds. So, the prediction markets gives an opportunity to gather experts around who are not afraid to put their money on the line and express what they think and to collect a consensus opinion so that we all know what we can possibly expect if is probably a better guess than what we individually could come up with.
So, a lot of the prediction markets, one of the problems that they currently have is that volumes are still pretty low, right? The markets are very illiquid. When you talk to institutional investors, you know, people you would like to be clients on your platform, which is called Forecast Trader, by the way, what are the big hurdles for them? Like, what are they What's stopping them from going all in on prediction markets at the moment?
Well, at this point, just it's very similar to any other market. When it starts, liquidity is always a big question, and it takes a long time to gather sufficient liquidity. If you look at, for example, the options markets that have been around now for 54 years, I think. Initially, there was very little liquidity, and it was very difficult to trade more than, say, 20 or 30 contracts at the time. Nowadays, you can trade thousands or maybe even millions of contracts. So, it has developed over the past five decades really well and stock market is basically similar.
What unlocked the liquidity? Was there a market design choice? Like if you go back and you're thinking about okay, the history of the options market etc. Was it just time and existence or were there certain either regulatory or market structure decisions that had to be made that truly unlock the opportunity to take it to the next level volume wise?
Yeah, but I think over time people have become more familiar with the idea of what an option is and it is a fairly complex idea relative to what the prediction markets are. That's why we try to come up with something simpler than options and as far as that is concerned, I think we have done that. So it is not going to be as complex for people to understand a prediction contract as it is to understand an options contract. So I think that it will not take equally long time to develop sufficient liquidity.
So when I go on forecast trader right now, I see bets like you know, will the United States economy enter a recession by the end of the second quarter of 2026 or will 2026 be the warmest year on record which as we were talking about earlier, these are all things that I would say have economic implications. When you compare what Interactive Brokers is doing versus say a Kalshi or a Polymarket, is that how you're trying to differentiate yourself with more, you know, quote serious economically serious contracts? Is that your edge?
So don't forget that we are very different companies. Interactive Brokers has a large following of serious successful institutional investors and serious investors who are managing relatively large portfolios on our platform. Kalshi doesn't have that. So for us prediction markets are an addendum that enables us to basically round out our offering and our customers are now have the ability to gauge such questions and whether a recession, what how likely a recession is going to be. Kalshi has no investors basically other than investors in the prediction markets. So for them, it's first of all, it is hard to maintain yourself only on up until it really takes off. It's hard to generate enough trading volume to make a profit. So they had to add things like sports and of course that has become their mainstay and they are now very profitable due to sports. So if they didn't do sports, maybe they couldn't even support the platform. I don't know.
But just to be clear, do you get the impression that from the perspective of this broad institutional world that's going to come to prediction markets that one of your edges will be this focus that you're not in sports, that you're not in random pop culture, that this is going to be contracts that have the sort of quote serious investor in mind. Is that part of why you really have an edge in this space?
Is by choice. I mean, we prefer to focus and concentrate on serious questions having to do with our clients' investments. Maybe some of them would like us to have sports, but we just don't want to distract them with that.
Say more about that. So how are you actually choosing the contracts that you're presenting as options to investors?
So we are choosing contracts that in our minds have questions, the answers to which have serious economic consequences. So for example, global warming, I think is a huge question. Maybe not this year, but 10 20 years from now it certainly will be or the rate of adoption of AI or I mean, you know, really significant questions that basically will determine how we live our lives 10 to 20 years from now and therefore it's important for us to have questions for to those answers so that people that enter schools today or decide to buy a house somewhere or decide what profession they are going to study and develop into, these sorts of questions deserve to have serious answers so that they can decide what to do.
IBKR of the brokerage platforms that a retailish person could access, always been like one of the most sophisticated in terms of the wide range of instruments that are available from stocks to bonds to futures etc. Is this the first time that you have a sort of your own market that you built on the platform rather than IBKR simply being a window or a venue to trade on some other market? Is this new for you?
In a big way, yes. We've never done anything as large as this that is so different than what already existed. But as we were going along building out the platform over the last almost five decades, we certainly have always been on the edge of trying to bring in new things.
Sure. And but in terms of like okay, like if I trade a share of Microsoft on IBKR, there are established exchanges that presumably that trade is going to be routed through. Whereas with forecast trader, you are the market, you're the broker and the venue at the same time. And part of what's novel about prediction markets generally is this thing where the broker and the market venue are fusing in a way that has not been the case historically with say CME futures, it's not been the same way with stocks. So from a market structure standpoint, is IBKR in a new position by the fact that it's essentially both the broker and the exchange for these instruments?
You're probably correct in that although the app had in the past started several indexes and various futures contracts, but indexes and futures contracts, different ones, but they already existed. Yeah. So the prediction market as such is yes, it's you are correct. It's the first market where nothing has existed like it.
Actually, on that note, you know, I alluded to your history in the markets, very long history and formative history, but how come we didn't get prediction markets sooner? You know, like we could have been betting on global warming five or 10 years ago and it doesn't seem until I was reading about prediction markets a long time ago.
We started developing the prediction markets roughly 10 years ago. And the problem was that we had some consultants of the firm that were doing some other work and they found out that we were working on prediction markets and at that time we were trying to go for a banking license and they said, well, you will never get your banking license if you come out with this prediction market. As a matter of fact, the SEC will not take kindly to it and you will have all kinds of problems if you really do this. So what we did, we already had built the whole system. So what we did was we released it for phantom money. And people were playing around on it for phantom money and it eventually petered out because phantom money is not really interesting. And but it took hold enough for the people who founded Polymarket and Kalshi to see it and to play with it and then they had a better idea and they went forward with it and you know, Kalshi went to Mazur, went to the CFTC and got himself licensed. And I was really upset when I saw that and then of course, you see, it was easy for him because they had nothing. So they had nothing to lose. You see, the problem is that when you have a flourishing business, it's very hard to do new things because the downside is so big for you. So he went ahead and then I wanted to buy Kalshi, but they wouldn't entertain a sale. And they didn't even give me a price.
What year was that? Then I Sorry? What year was that that you were trying to buy it?
Ooh, I think about 5 years ago.
Oh, wow. That was going to be my next question. Why didn't you just buy Kalshi at that point? What Are you going to Is it So then I went to the CFTC and I asked for my own license. And they took 3 years to work it through and give it to us, but we eventually got it last year.
Actually, we got it in 2024, just before the elections, yeah.
Wait, this is interesting. So I was just about to ask you, like was it the election that enabled you to get into it, but it sounds like actually you would have been able to get into the space even without the change in administration.
Well, look, I mean, I'm in a very lucky circumstance where we have a flourishing profitable business, so we can support this crazy addiction to the prediction markets that is basically a loss leader. And we are very sure that eventually it will be very profitable.
I'm just One other quick market structure-ish question. Are you going to provide leverage? How does that work for these instruments for your institution?
On that right now. Up to now it's been a very easy situation because we've not See, a broker always has to worry about providing leverage. So most brokerage firms when they go bust because of the leverage they provide. And if you look at the big Wall Street crisis, they all have to do with leverage always. So but eventually we will have to provide leverage. The question is how do you structure that? And that is going to be I'm sure there will be some firms that will go bust on leverage in prediction markets, yes.
Do you see a world where, I guess, prediction market prices kind of become standard reference data, like the same way we look up credit spreads or something like that?
Absolutely, yeah. Certainly. You know, right now you're saying that is the say the Fed going to cut rates or not? I mean, yeah. People are consulting economists and say that's what the consensus opinion is, but it's not as clear as just look at a clean probability that the prediction market provides from just one plain number to see what the probability is that.
Wait, why is it not as clear? Because consensus opinion. Cuz I can go to the bond market and back out what the bond market thinks about future Fed moves, and that's a huge market. Why would you need the prediction market to do that?
Well, no, you can go to the Fed funds market, not the bond market. You can go to the Fed funds market. That's true, but that's another interesting thing. So Fed funds markets existed for a long time, and it only recently that people really consult the Fed fund markets when they are wondering about rates and no longer talk to the economists. Because just 2 years ago people kept talking about what which economist says what, right? One day we're never going to have to consult economists again.
That's like the trader's dream, cuz traders...
That's the world prediction markets are going to... No, I think you see, I think that what will happen is that economists will begin to participate in the prediction markets. And instead of issuing their predictions, they will trade their own positions and good ones will make a lot of money and bad ones will lose.
But can we be, just among the three of us here, and no one else...
Yes, just among the three of us.
The three of us here for a second. Like traders, you guys really don't like economists, do you? Like you hold You do not hold them in particularly high esteem, right? Like let's be honest. It's just the three of us chatting here.
Well, for a trader, an economist is very confusing because it depends on which one you talk to, right? The prediction markets cure that deficiency, right?
So right now you could go to Robinhood and you could trade markets on You could trade Kalshi markets via Robinhood. And we had the CEO of Robinhood on Vlad Tenev, and they also might be building their own prediction markets venue. Is there ever a scenario in which IBKR both has its own prediction market, but is also a broker that would allow a user I could like trade futures via my IBKR account?
Absolutely. So we are coming out at the end of May with a consolidated feed where contracts that exist on several other platforms we will have consolidated so that when somebody comes to us, Interactive Brokers, to look at the market, we will give them with the consolidated feed, just like we do on stocks where stocks trade on, I don't know, 20 or so markets, and we always have the best bid and offer, and we always provide best executions based on all the possible venues where that stock trades, and we will do the same thing on prediction markets.
