Early on when I started my career, I left. I lost half my initial capital based on insider trading. So I'm extremely familiar with the damage it can cause. But on the other hand, and in spite of that, I'm in favor of not having any rules against insider trading. I would like all the information out there as soon as it's available. Because, look, as a society, we're better off knowing as soon as possible anything that is knowable. Right. So why do we have to wait forever? First of all, when you are faced with a merger or acquisition situation where most of the insider trading is happening, right? The secretaries, the lawyers, everybody knows about it. They go home day to day, rise day. So eventually it always filters out. So it's almost impossible to avoid. It's very, very difficult and cumbersome. Why don't we just do away with it and let the information come out as soon as possible?
Hello and welcome to another episode of the Odd Lots 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. 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 there's a great point. I mean, I think you're being generous, actually, with the Avengers thing. I mean, maybe you could say it, but, you know, for example, there is a market and it's actually you can track it on the Bloomberg terminal, 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 the 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 would only be using a proxy for it. But so the potential there in my mind for some of these things is obviously quite high. What you could say certainly in our current economic environment, being able to bet on things like, is the US going to strike Kharg 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 drug 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, you know, 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 we see in traditional futures, etc. So I think we both, yeah, like I do fully think that like there could be legitimate use cases where there are natural hedgers, natural liquidity providers for some of these, like, 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. Absolutely. They're great. No one's better. You know, there's like $20,000 on some of them that's beyond anything, 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. Absolutely. So we're going to get into the overall, you know, market structure, etc. all that good stuff. But we'll start with prediction markets. So Thomas, thank you so much for coming on Odd Lots.
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 the same. 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 together. The consensus opinion of people who are preferably experts or are the thinkers on the questions that we are going to ask and to gather the 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. But this is all my most recent development. Yeah. Like when GameStop happened, we were all sort of in shock that people were treating a stock as a token. Yeah, that's true. But you know, there's been, you know, pain for part of college trading, penny stocks and etc. So I know that. And if you go back to, you know, penny stocks are the original prediction markets go back to the Jesse Livermore era of true bucket shops. And it was like, you know, pretty messy, etc. So from your perspective, let's talk about like right now there's if you if we're talking about prediction markets in the U.S, you know, it's really heavily sports betting, then there's some election stuff and then there's some silly things etc., like just starting from 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 that, 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 trading 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 decide for what the future holds. So the prediction markets gives them 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 it's 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 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 since the 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 unlocked 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 tried 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 they do not take equally long time to develop sufficient liquidity.
So when I go on Forecast Trader right now, I see that 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 because 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 have the ability to gauge such questions about whether a recession is going to happen. 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 have to add things like sports. And of course, that has become their mainstay. And they are not very profitable due to sports. But if so if they didn't do sports, maybe they couldn't even support the platform. I don't know.
Just to be clear, like, 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 this sort of, quote, serious investor in mind. Is that part of why they say this is by choice?
We prefer to focus and concentrate on serious questions having to do with our clients. The investment, maybe some of them would like us to have sports, but we just don't want to distract them with 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 serious economic concerns, the outcomes of the questions they are the answers to, which have serious economic consequences. So for example, global warming I think is a huge question. Maybe not this year, but ten, 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, in 10 to 20 years from now. And therefore that it's important for us to have questions for those answers so that people that 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 as of the brokerage platforms that a retail-ish 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, as we have 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 know, you're probably correct in that although we have had in the past started several indexes and various futures contracts, but indexes and futures contracts are different ones. But they already existed. Yeah. So the prediction market is such is, is. Yeah. It's the first market that where nothing has existed like it actually.
On that note, you know, I alluded to your history in the markets, very long history and informative history. But how come we didn't get prediction markets sooner? You know, like, we could have been betting on global warming 5 or 10 years ago. And it doesn't seem until, you know, I was reading about prediction markets in college.
We started developing the prediction markets roughly ten years ago. And the problem was that we had some consultants at 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 CFTC 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. Oh, and people were playing around on it for phantom money, and that eventually petered out because phantom money's not really interesting. Yeah. And but it took hold enough for the people who fund that market and actually to seed and to play with it. And then they, you know, they had a better idea and they went forward with it. And, you know, Kalshi went to the CFTC and got himself a license 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 it, then 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. And they had a sale and they didn't even give me a price.
What year was that that you were trying to buy it?
Oh, I think about five years ago.
Oh, wow. I was going to be my next question. Why didn't you just buy Kalshi at that point?
Then I went to the CFTC and I asked for my own license, and they took three years to work it through and give it to us. But we eventually got it last year. No, actually, we got it in '24 just before the election. So.
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 election. Even without the change in administration. But so, look, I mean, we are in the very lucky circumstance where we have a flourishing, profitable business. So we can support this crazy addiction to develop the prediction markets, that is basically a loss leader. But, and we are very sure that eventually it will be very profitable.
One other quick market structure-ish question. Are you going to provide leverage? How does that work for these instruments?
We're working on that right now. It is so up to and it's been a very easy situation because, I mean, they didn't have to. You see, a broker always has to worry about providing leverage. And so, most brokerage firms, when they go bust, 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. Yeah. 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 so.
Yes, absolutely. Yeah. So certainly share to them. I mean, you know, right now when you were saying that is the Fed going to cut rates or not? I mean, yeah, people are consulting economists and say that that's what the consensus opinion is, but it's not as clear as you have to look at that clean probability that the prediction market provides one year, just one plain number to see what the probability is that it's a consensus opinion.
Wait, why is it not as clear? Because 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 markets. Yeah, not the bond markets. Okay. You can go to the fed funds market. Is that that is true. And but that's another interesting thing. So fed funds markets existed for a long time. And it's only recently that people really considered the fed fund markets when they are wondering about rates and no longer talk to the economists. Because just two years ago people kept talking about what which economist says about rates. One day, we're never going to have to consult an economist again.
That's like the trader's dream because the world prediction markets are I think you see, I think that what will happen is that economists will be begging to participate in the prediction markets. And instead of issuing their predictions, they will trade their own positions, and the good ones will make a lot of money and bad ones will lose. But can we just among the three of us here, no one else. Is that three among the three of us here for a second, like traders. You guys really don't like economists, do you? Like, you do not hold them in particularly high esteem, right? Like, let's be just. It's just the three of us chatting here.
For a trader, an economist is very confusing because it depends on which one you talk to. Right. So and the prediction markets cure that deficiency.
