Thomas Peterffy on Interactive Brokers' Plan to Professionalize Prediction Markets

Right now, when you think about prediction markets, you basically think about two main companies: Polymarket and Kalshi. And then when you think of what's being traded on those platforms, there's a whole range of stuff from elections to sports to real economic outcomes, to totally gonzo random stuff, like who will win the next season of Big Brother. So far, sports is where a lot of the money is. But at least in theory, prediction markets could be a popular instrument for professional, institutional traders. Thomas Peterffy is the founder and chairman of Interactive Brokers, one of the most successful and groundbreaking electronic brokerages for both institutions and serious retail traders. Now Interactive Brokers is getting into the predictions space. In this episode, we talk to Peterffy on why he believes prediction markets will be the next big thing in markets, why he thinks his firm could be a major player, and what it will take to transform the space from a large curiosity to something seriously used by institutions. Subscribe to the Odd Lots NewsletterJoin the conversation: discord.gg/oddlotsSee omnystudio.com/listener for privacy information.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Joe Weisenthal?

  There are some market stories where you want every detail. Tracy and I have made quite a few podcasts on that basis, but sometimes you've only got 10 minutes and need to know what's moving markets and why. That's the Barclays Brief Podcast. Every week, experts from Barclays Markets and research get you up to speed on what matters and what to watch next, about the time it takes to grab a coffee. So, search Barclays Brief wherever you get your podcasts.

• 0:26Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk, and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs, and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw, innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting and hiring practices, but according to recruiters, advisors,

• 1:11Speaker 01

  and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company, and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates, quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at chatgpt.com.

• 1:48Speaker 01

  Hey there, all lots listeners. Joe and I are very excited to announce-

• 1:52Tracy Alloway?

  That we will be hosting a live show in London on Thursday, May 7.

• 1:59Joe Weisenthal?

  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.

• 2:14Tracy Alloway?

  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 Odd Lots 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 7, doors opening at 6 p.m.

• 2:36Joe Weisenthal?

  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 Odd Lots newsletter. So go find the Odd Lots newsletter. Just search for it, subscribe to it, and the link will be there before it's anywhere else. So this is your chance. Plus, if you like Odd Lots, if you like, 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.

• 3:09Tracy Alloway?

  Hope to see you there.

• 3:13Tracy Alloway?

  Bloomberg Audio Studios, podcasts, radio, news.

• 3:28Tracy Alloway?

  Hello and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

• 3:32Joe Weisenthal?

  And I'm Joe Weisenthal.

• 3:33Tracy Alloway?

  Joe, sometimes, sometimes, I go on prediction markets.

• 3:37Joe Weisenthal?

  Uh huh, yeah.

• 3:37Tracy Alloway?

  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.

• 3:47Joe Weisenthal?

  Yes.

• 3:47Tracy Alloway?

  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?

• 4:10Joe Weisenthal?

  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.

• 4:16Tracy Alloway?

  Maybe.

• 4:17Joe Weisenthal?

  You could stretch, but, you know, for example, there is a market, and it's actually, you can track it on the Bloomberg, that says on Kelsey, 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.

• 4:48Tracy Alloway?

  Well, you could say, certainly, in our current economic environment, being able to bet on things like, is the US going to strike Carg 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.

• 5:04Joe Weisenthal?

  Yes, exactly.

• 5:05Tracy Alloway?

  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.

• 5:21Joe Weisenthal?

  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, et cetera. 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, swaps, some of these pure binary instruments, et cetera. 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.

• 6:03Tracy Alloway?

  Absolutely.

• 6:04Joe Weisenthal?

  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.

• 6:13Tracy Alloway?

  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 Tomas 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 Tomas, thank you so much for coming on Odd Lots.

• 6:56Speaker 03

  Thank you very much for having me.

• 6:58Tracy Alloway?

  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 Calci or Polymarket versus someone with a lot of money who might be interested in trading in size?

• 7:17Speaker 03

  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,

• 8:00Speaker 03

  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.

• 8:35Joe Weisenthal?

  That was excellent. And first of all, I think that's a great point, obviously, that the stock market contains both Microsoft and Nvidia, and it also includes GameStop.

• 8:45Tracy Alloway?

  Yeah, but this is also a recent development.

• 8:47Joe Weisenthal?

  Yeah.

• 8:48Tracy Alloway?

  Like, when GameStop happened, we were all sort of in shock that people were treating a stock as a token.

• 8:54Joe Weisenthal?

  Yeah, that's true. But I paid for part of college trading penny stocks, etc. So I know that. And if you go back to, you know.

• 9:01Tracy Alloway?

  Penny stocks were the original prediction markets.

• 9:04Joe Weisenthal?

  Go back 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, 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? Do you expect that these to become big-volume contracts at some point?

• 9:44Speaker 03

  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 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 us an opportunity to gather experts around who are not afraid to put their money on the line and express

• 10:29Speaker 03

  what they think, and to collect a consensus opinion so that we all know what we can possibly expect.

• 10:39Speaker 03

  It's probably a better guess than what we individually could come up with.

• 10:45Tracy Alloway?

  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?

• 11:08Speaker 03

  Well, at this point, 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 run up 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 a time. Nowadays, you can trade thousands or maybe the millions of contracts. So it has developed over the past five decades really well. And the stock market is basically similar.

• 11:53Joe Weisenthal?

  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, et cetera. 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?

• 12:17Speaker 03

  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 it will not take equally long time to develop sufficient liquidity.

• 12:58Tracy Alloway?

  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?

• 13:32Speaker 03

  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 of whether a recession, what likely a recession is going to be.

• 14:17Speaker 03

  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 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.

• 14:59Joe Weisenthal?

  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 have an edge?

• 15:25Speaker 03

  This is by choice. 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.

• 15:45Tracy Alloway?

  Say more about that. So how are you actually choosing the contracts that you're presenting as options to investors?

• 15:52Speaker 03

  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 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

• 16:35Speaker 03

  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.

• 17:11Tracy Alloway?

  There are some market stories where you want every detail. Joe and I have made quite a few podcasts on that basis. But sometimes you've only got 10 minutes and just want to know what's moving markets fast. That's the Barclays Brief Podcast. Every week, experts from Barclays Markets and Research get you up to speed on what's happening and what to watch next. Concise, focused, and brief. Search Barclays Brief wherever you get your podcasts.

• 17:38Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw, innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting

• 18:20Speaker 01

  and hiring practices, but according to recruiters, advisors, and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company, and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates, quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at ChatGPT.com.

• 19:01Joe Weisenthal?

  IBKR 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, et cetera. 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?

• 19:36Speaker 03

  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.

• 20:00Joe Weisenthal?

  Sure. 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?

• 20:44Speaker 03

  You're probably correct in that although we have had in the past started several indexes and various futures contracts, but...

• 20:57Speaker 03

  Indices and futures contract different ones, but they already existed.

• 21:02Joe Weisenthal?

  Yeah.

• 21:03Speaker 03

  So the prediction market as such is, yes, it's, you are correct. It's the first market where nothing has existed like it.

• 21:14Tracy Alloway?

  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,

• 21:31Joe Weisenthal?

  I was reading about prediction markets in college.

• 21:34Speaker 03

  We started developing the prediction markets roughly 10 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 up 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.

• 22:15Speaker 03

  So what we did, we, we already had built the whole system. So what we did was we released it for phantom money.

• 22:26Tracy Alloway?

  Oh.

• 22:27Speaker 03

  And people were playing around on it for phantom money. And that eventually petered out because phantom money is not really interesting.

• 22:37Joe Weisenthal?

  Yeah.

• 22:38Speaker 03

  And, but it, it took hold enough for the people who funded Polly Market and Kashi to see it and to play with it. And then they had a better idea and they went forward with it. And, you know, Kashi 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 even then, I wanted to buy Kashi,

• 23:24Speaker 03

  but they wouldn't entertain a sale. They didn't even give me a price.

• 23:30Joe Weisenthal?

  Huh. What year was that?

• 23:31Speaker 03

  Then I, sorry?

• 23:33Joe Weisenthal?

  What year was that that you were trying to buy?

• 23:36Speaker 03

  Oh, I think about five years ago.

• 23:39Joe Weisenthal?

  Oh, wow.

• 23:40Tracy Alloway?

  That was gonna be my next question. Why didn't you just buy Kashi at that point?

• 23:44Joe Weisenthal?

  What, are you gonna?

• 23:45Speaker 03

  So then I went to the CFTC and I asked for our own license. And they took three years to work it through and give it to us. But we eventually got it last year.

• 23:58Joe Weisenthal?

  How big?

• 23:59Speaker 03

  Actually, we got it in 24, just before the elections, yeah.

• 24:02Joe Weisenthal?

  Wait, that's 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.

• 24:16Speaker 03

  Well, look, I mean, we are in a very lucky circumstance where we have a flourishing, profitable business. So we can support this crazy addiction to develop the prediction market that is basically a loss leader. And we are very sure that eventually it will be very profitable.

• 24:38Joe Weisenthal?

  I'm just, one other quick market structure-ish question. Are you gonna provide leverage? How does that work for these instruments for your institutional?

• 24:49Speaker 03

  We're working on that right now. Up to now, it's been a very easy situation because of it. You 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.

• 25:16Joe Weisenthal?

  Yeah.

• 25:17Speaker 03

  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.

• 25:36Tracy Alloway?

  Hmm. Do you see a world where, I guess, prediction market prices kind of, kind of become standard reference data, like the same way we look up credit spreads or something like that?

• 25:47Speaker 03

  Yes, absolutely, yeah, certainly, certainly. You know, right now, you're saying, is the, say, the Fed going to cut rates or not? I mean, yeah, people are consulting economists and say that's, that's what the consensus opinion is, but it's not as clear as just look at that clean probability that the prediction market provides, just one plain number to see what the probability is that.

• 26:16Tracy Alloway?

  Wait, why is it not as clear?

• 26:18Speaker 03

  The consensus opinion.

• 26:19Tracy Alloway?

  Because I can go, 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?

• 26:31Speaker 03

  Well, no, you can go to the Fed funds markets, not the bond markets.

• 26:35Tracy Alloway?

  Okay.

• 26:36Speaker 03

  You can go to the Fed funds markets, that's, that, that is true, but that's another interesting thing. So Fed funds markets existed for a long time, and it's 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 two years ago, people kept talking about what, which economist says what, right?

• 27:08Joe Weisenthal?

  One day, we're never going to have to consult economists again. That's, that's like, that's like the trader's dream.

• 27:14Tracy Alloway?

  That's the world prediction markets are going to be.

• 27:16Speaker 03

  No, I think, you see, I think that what will happen is that economists will be, begin to participate in the prediction markets. And instead of issuing their predictions, they will trade their own.

• 27:33Speaker 03

  Positions and good ones will make a lot of money and bad ones will lose.

• 27:40Joe Weisenthal?

  But can we be just among the three of us here? No one else is listening.

• 27:45Speaker 03

  Yes, just among the three of us.

• 27:46Joe Weisenthal?

  Just 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 honest, it's just the three of us chatting here.

• 28:00Speaker 03

  Well, for a trader, an economist is very confusing because it depends on which one you talk to, right?

• 28:08Speaker 03

  The prediction markets cure that deficiency, right?

• 28:12Joe Weisenthal?

  Yeah. So right now, you could go to Robinhood and you could trade markets on, you could trade Kelsey markets via Robinhood. And we had the CEO of Robinhood on, Vlad Tenneff, and they also might be building their own prediction markets venue. Is there ever a scenario in which IBKR both has a its own prediction markets, but is also a broker that would allow a user, I could like trade futures via my IBKR account?

• 28:44Speaker 03

  Absolutely. So we are coming out at the end of May with a consolidated feed, where contracts that exist on several platforms, we will have consolidated so that when somebody comes to us, interactive brokers to look at the market, we will give them a 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 that stock trades. And we will do the same thing on prediction markets.

• 29:29Joe Weisenthal?

  That makes a lot of sense, that analogy of like best execution. The one issue that I could see arising, and I'm curious your thoughts, like a share of Microsoft is a share of Microsoft regardless of whatever, however, number of exchanges it trades on. A bet on a US recession could be different depend because then it gets on to contract specifications and how Kelsey defines when a recession is triggered could be different than how a different platform defines the same thing. So how much of this is going, in terms of the future of the industry, is going to depend on a certain degree of alignment among platforms?

• 30:09Tracy Alloway?

  Fungibility.

• 30:10Joe Weisenthal?

  Yeah, fungibility to align across contract specifications. And is there work being done on that?

• 30:17Speaker 03

  So fungibility is a great issue and it is in the interest of the market participants to create as much fungibility as possible. So accordingly, we are going to structure our contracts to be identical.

• 30:34Joe Weisenthal?

  Okay.

• 30:35Speaker 03

  Whenever it's possible.

• 30:37Tracy Alloway?

  That's interesting. Can we go back to making fun of economists for one second? But you know, you made the point that when you're talking to economists, it depends on whether you're talking to a good one. And part of the whole idea of prediction markets is you incentivize people with good information to express their opinions in exchange for money. Recently, there's been the issue of, I don't even want to say insider trading or insider information, because I don't know what constitutes insider trading or insider information in the prediction market, but there's been a sense that we've had a few political developments and there've been big trades on prediction markets ahead of some of those. Maybe someone knows something ahead of time and they're betting on it.

• 31:20Tracy Alloway?

  I don't know if that's wrong per se or illegal per se, but when you talk to institutional clients, how concerned are they about the perception of insider trading on these platforms?

• 31:34Speaker 03

  So insider trading has always been.

• 31:39Speaker 03

  An issue.

• 31:42Speaker 03

  I mean, early on, when I started my career, I lost half my initial capital based on insider trade. 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 several?

• 32:23Speaker 03

  First of all, when you face 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, they tell their wives, their husbands, they... So it eventually 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?

• 32:56Joe Weisenthal?

  Sorry, just to be clear, when you say this, you're talking about all markets here, not just prediction.

• 33:00Speaker 03

  All markets.

• 33:01Joe Weisenthal?

  Okay, so even in the software, the counter, one counter argument, I can think of a couple. There are many, yeah. But one counter argument would be liquid capital markets are a very good thing for the economy. And why would I ever want to participate in a capital market if it's known that there are going to be sharks, et cetera, that are just like have such an information edge that I could never win? And so, yes, I...

• 33:29Speaker 03

  But you see, there are sharks right now. But if insider information just came out as soon as possible, there would be very little opportunity for the sharks to be around. Because you could be a shark for a second or two, but that's it. Nowadays, sharks can be around for... Weeks and months.

• 33:52Joe Weisenthal?

  Another argument would be that from a corporate perspective, I don't want all my secrets to be monetizable so easily. So like, I want to be able to share information with a group of people inside and not have to worry.

• 34:08Speaker 03

  Yeah, but then protect them yourself. Don't rely on, on national laws to, to protect you. I mean, protect them yourself.

• 34:17Joe Weisenthal?

  And just stop talking to them.

• 34:19Tracy Alloway?

  Yeah, wait, I want to hear more about, you, you mentioned that you lost a bunch of money.

• 34:23Joe Weisenthal?

  Yeah.

• 34:24Tracy Alloway?

  Half your capital.

• 34:25Joe Weisenthal?

  Tell us that story.

• 34:25Tracy Alloway?

  From insider trading. What's that, yeah, what's that about?

• 34:30Speaker 03

  So, so when I, I bought my seat on the American Stock Exchange as an options trader in 1977. And I had $200,000 of saved capital that I started my option trading business with on the floor of the American Stock Exchange. And maybe a year or so later, I was standing in Dupont. And in those days, options were trading in 16s and eights. And it was a, you know, a day before expiration. And there was a very cheap out of the money call that was to be expired the next day.

• 35:15Speaker 03

  And somebody came in and in, according to my fair value sheets that I, only I had in those days. Because I had my own options formula and I, I generated these sheets for myself. That option was worth about $25, $26. And somebody came in and offered it a 3H, which is $18. Offered to me 300 of those options at $18. And I bought all 300, which was at that time, the biggest trade I've ever done. And just as the broker walks out, another broker walks in and he says, where can I buy 500 of these?

• 35:59Speaker 03

  And nobody said anything. Everybody was stunned. And I said, three eights. And he said, okay, how many? I said, five hundred. I was so overwhelmed by the amount of profit I was suddenly making in a five minute period of time that I gave up all caution and I sold him the five hundred. So I was as a result, two hundred short. And then in the next several minutes, the stock halted trading. And half an hour later, it reopened with the news that DuPont had a fantastic quarter and they were splitting the stock three to three, four, one.

• 36:40Speaker 03

  And it opened way, way up. So the option I sold, two hundred of net for three eights opened at four and a half dollars.

• 36:50Tracy Alloway?

  I can see why you would be traumatized by insider trading.

• 36:53Speaker 03

  And yet, I was really traumatized. I lost ninety thousand dollars. And it was horrible. But I still say to you that I think the best thing we could do about inside information is just to get the news out there as fast as possible and forget about persecuting people.

• 37:15Tracy Alloway?

  I love that idea also that you had your own fair value sheets, which I, you know, I presume those were sheets that were actually written down at that time in your pockets.

• 37:25Speaker 03

  They were computer generated. I had a computer at home. And I had developed my own option formula in, well, much earlier in, in nineteen seventy.

• 37:39Tracy Alloway?

  And you were carrying them around on pieces of paper on the floor?

• 37:43Speaker 03

  Yeah, I had folded up in all my pockets.

• 37:46Tracy Alloway?

  Okay, so, so on this note, I mean, you were one of the earliest people to automate market making. That's what you're famous for. And you've been through the whole transition from humans actually trading on the floor to everything being automated nowadays. Obviously, AI is this huge thing in the market and in our lives right now. When you look at AI and compare it to the early days of electronic trading. What's similar and what feels different to you now? Is this just another technological improvement? Another wave of productivity enhancing tech? Or is this something fundamentally new in your mind?

• 38:25Speaker 03

  Well, it's a huge leap in technological developments. But it's basically as a computer programmer. I look at it basically as a new higher level language that is much, much, much, much more powerful than anything that came before. But qualitatively is not different than the way we went from machine language to assembler language to Fortran and COBOL and eventually C and all the other languages. So this is a natural language. So AI is basically a higher level language, which is a natural language.

• 39:05Speaker 03

  And it also has to it available all the data that exists in the world. So that's why it is so immensely powerful. But as far as trading is concerned, basically automated trading has existed for a long time. We have started our first automated trading systems in 1983 and continued developing that ever since. And then eventually when other traders came in and bought out the order flow from brokerage firms, we didn't think that we should do that. So then we went out of the market making business.

• 39:49Speaker 03

  But up to that point, we were the largest market makers in the world.

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• 41:33Joe Weisenthal?

  God, I have so many. I have so many questions. Actually, can we just go back real quickly to the options pricing model that you have? It's funny, this is the second time in a few weeks someone was telling me about, and I've been in a conversation about options trading in the early days. What were you programming that in? What language? And was it the kind of thing where, like, you would leave the computers running overnight and then you, like, come back in the morning and after?

• 41:55Speaker 03

  Nah.

• 41:56Joe Weisenthal?

  Because that's, tell us about, like, the technology that enabled you to determine fair market value of options back then?

• 42:04Speaker 03

  So I had an Olivetti computer at home, a desktop, Olivetti desktop computer at home, and when I started to think about options, I started to run simulations and see at what prices I would break even. And then eventually derived the idea of a probability distribution curve based on which I would determine the prices of options that after selling

• 42:33Speaker 03

  To myself, many options I would break even at which price. And that's how I determined what the correct value for an option is. And that eventually that turned into a formula and code. So I I use that computer. And if you go to interactive brokers today, there is something we call probability lab. Where we can we can display, where we do display the probability distribution associated with the future price changes of any stock.

• 43:08Joe Weisenthal?

  Oh, yeah.

• 43:08Speaker 03

  That we derive from the existing option prices. So you can see that there and you can basically learn about options very well.

• 43:17Joe Weisenthal?

  I never saw this page before, but this makes a lot of sense to me. And I'm always been a little bit surprised that you don't hear more about translating option math into sort of normal intuitive odds, because it seems like a very normal thing. One other que, you know, you mentioned AI as being like a new, the next iteration, maybe the last iteration, because it's natural language of computer programming. But most computer programming is like, it's deterministic, right? So if you write a line of code, it will do the same thing every single time. There's some rule and it'll always be the same. You put in the same query into chat GPT, you will not always get the same output.

• 43:58Joe Weisenthal?

  In fact, frequently you won't, even with the exact same query of anything. When you're thinking about applications of AI within finance, et cetera, does the non deterministic element of AI models change?

• 44:12Speaker 03

  Probabilistic language, right? That's why it is not always the same.

• 44:16Joe Weisenthal?

  Right.

• 44:16Speaker 03

  Probabilistic is not deterministic.

• 44:19Joe Weisenthal?

  Right. Does that have implications for its use in finance?

• 44:24Speaker 03

  Well, option prices are probabilistic. Prediction markets are probabilistic. That's what my initial impetus was for prediction markets to teach people probabilities. Because people tend to not think probabilistically. They tend to think, well, either this will happen or will not happen. And that somebody knows. And that's not how it is. There is a probability for something to happen. And nobody knows what really will happen.

• 44:53Tracy Alloway?

  Do you know how to code in COBOL?

• 44:56Speaker 03

  In COBOL, I can, well, in COBOL, I cannot. But I can code in FORTRAN or FOR, or BASIC, or C. Number of languages.

• 45:09Tracy Alloway?

  You know, you could be making a lot of money fixing old mainframe systems and integrating them. Have you considered doing that?

• 45:17Speaker 03

  Yeah.

• 45:18Joe Weisenthal?

  Just going back sort of full circle to the prediction markets. I basically, you know, you're probably right. One day they'll be big. What's the timeframe? Do you have like a testable theory? Can you give us a number for how big you think they'll be? You know, we don't want to treat you like some economist who just makes a forecast that could never be tested or whatever. We want something hard. So like, can you give us like, you know, end of 2027? Do you have like, or end of 2026? How big will they be so that we could come back? And we could say, was Tomas correct about how big this space is going to be or not?

• 45:53Speaker 03

  Well, there is.

• 45:56Speaker 03

  I don't think there is a good way to, to. I mean, I'm always stunned when I read these projections from consulting firms about how big something will be so many years ahead of time. I have no idea how to evaluate that. But all I think, all I know is that it's going to be very, very big. Because it's extremely.

• 46:24Speaker 03

  Useful and it's a it's a very simple way for all of us to direct our decision making, a prediction market and to hedge our decision making.

• 46:37Joe Weisenthal?

  Yeah, I was just I was just gonna say Tracy, I noticed one of the contracts that they have on IBKR is will UCLA's out of state tuition exceed $53,000 in 2026? As someone who has children who like in the next decade are gonna go to college, like this could be a very useful thing for me to hedge at some point. Like my daughter heard that there's a good theater school. She said on UCLA already. UCLA, she said, I heard there's a good theater school at University of Michigan. And so I have to start thinking about like University of Michigan out of state tuition. Kids these days are very focused. But this could be a very useful instrument for me.

• 47:15Speaker 03

  Absolutely. Well, college tuitions, we were thinking about listing them at one point.

• 47:22Tracy Alloway?

  Can I ask a conceptual question, which is like, if prediction markets really take off and we have more and more money that is being placed on whether or not the actual event itself happens, what does that mean for capital markets? Because I think about capital markets, you know, everyone in finance for years and years and years said this is about the efficient allocation of capital into productive industry. And one way of betting on the future of the US economy would be by buying US equities and that money goes into companies and it creates jobs and a feedback loop and all of that.

• 48:03Tracy Alloway?

  If I'm just betting on the actual outcome, what does it mean for actually funding economic activities?

• 48:11Speaker 03

  So the money you put at risk, but the money is not laying around. The broker will take that money and put it into treasury bills, right? So as you know, there is an awful lot of money that is in treasury bills and that's financing our deficit. And so that's where your money will be employed.

• 48:33Joe Weisenthal?

  From a regulatory standpoint, is there anything right now that you think the CFTC could or should be doing to further to further along this market?

• 48:43Speaker 03

  No, I think the big regulatory problem is that.

• 48:50Speaker 03

  There are many questions concerning specific companies that we would love to ask, but we do not know if the question would be a security or a commodity, and do not know who should properly regulate it. And therefore, we don't ask these questions. But it would be extremely useful for us to be able to ask about, you know, the future developments of Nvidia or Microsoft or Google or etc.

• 49:22Joe Weisenthal?

  So this could be like contracts either related to will they beat or miss their earnings estimates? It could be contracts related to when will they announce...

• 49:31Speaker 03

  Or the number of employees they will have, or the average salary they will have, or etc. But the problem is that the price of Google is a security. We know that. The price of the shares are securities. So the legislation says that anything, anything that has an impact on the stock price would be, on the financial statement, would be a security. So there's a lot of stuff that has an impact on the financial statement, but nobody is listing it in any way.

• 50:13Speaker 03

  So this fogmire would have to be cleaned up. And then we would have a much better market.

• 50:22Joe Weisenthal?

  It sounds like we need to merge the SEC and the CFTC.

• 50:26Speaker 03

  That would be great.

• 50:29Tracy Alloway?

  All right, Tomas Petterfeet, thank you so much for coming on Odd Lots. Really appreciate it.

• 50:34Speaker 03

  Thank you very much.

• 50:48Tracy Alloway?

  Joe, that was an interesting conversation.

• 50:49Joe Weisenthal?

  That was great. I was not expecting Tomas to be, I don't, you know, I, maybe I should have, but um, it's interesting to hear him completely just say, let's get rid of insider trading laws.

• 50:59Tracy Alloway?

  Yeah. Clearly that was a formative experience for him and perhaps he wants to be on the side of the people that made money in that transaction rather than the people that lost out. The other thing I thought was really interesting was the history with Kalshi.

• 51:15Joe Weisenthal?

  Yeah, which I hadn't appreciated. I think this is gonna be like such an interesting space. It's a weird industry, I think, prediction markets, because it's an industry that basically is two companies right now, which barely counts as an industry. But we know from having talked to Vlad at Robinhood, they're gonna like build their own. And then now, obviously IBKR is, you know, has its own. There's a few interesting questions, but one is like, where is the value gonna accrue? Is it gonna be like the venue where the trading is?

• 51:46Tracy Alloway?

  Yeah.

• 51:46Joe Weisenthal?

  Is it gonna be who has the distribution? Because obviously Robinhood and IBKR have incredible distribution via the fact that lots of people do other trading on there. It still feels like very much a jump ball in terms of who makes the money in this space.

• 52:00Tracy Alloway?

  Totally. Well, the other thing that was interesting was the idea of creating standardized contracts.

• 52:04Joe Weisenthal?

  Yeah, yeah.

• 52:04Tracy Alloway?

  You know, something more fungible. And then I wonder, well, if you do that, do you have to create like an ISDA type body that's gonna adjudicate on these things?

• 52:13Joe Weisenthal?

  Right. Yeah, no, that's, that's gonna be like a huge question. My gut is that Tomas is right. Like if he is saying these are gonna be a really big thing and he's like traders are gonna wanna have these instruments, who am I to disagree? Like I maybe like they won't be big for like random pop culture stuff, but are they gonna be big for like recession things and stuff like that? If Tomas thinks so, then I think so. That's where I stand.

• 52:39Tracy Alloway?

  It does feel like the steady march of progress is sort of in this direction. But progress, progress.

• 52:45Joe Weisenthal?

  And air quotes.

• 52:45Tracy Alloway?

  It feels inevitable, but also, I mean, it's hard not to, he mentioned GameStop and it's hard not to think. Think back to just, you know, what, five years ago now?

• 52:54Joe Weisenthal?

  Yeah.

• 52:55Tracy Alloway?

  When GameStop happened, it was such a big story precisely because it was such a departure from the way people had treated stock markets previously.

• 53:03Joe Weisenthal?

  Yeah, but you know what? I agree completely. But I had a thought, actually, when he said that, that, um, which is, you know, for a long time, and there's the famous quote equities in Dallas and it's like, there was a period not that long ago in American financial history where stocks themselves were not regarded as a particularly important market in and of themselves. Otherwise, they wouldn't have talked about how the stock traders would have had to move out to Dallas. That's a phrase because the perception was that stocks weren't where the action is. And so it occurs to me like, yes, when GameStop came out, that's like, everyone was like clutching their pearls and scandalized at the market, me included. It was like, oh, people are treating it like a joke.

• 53:45Tracy Alloway?

  You can call me a grandma, too. I know that's where you're going. It's fine.

• 53:48Joe Weisenthal?

  No, no, seriously, like, everyone was, but like, when you actually think about the big sweep of like, stock market history in the United States, you know, maybe we shouldn't hold it up on such a pedestal. There's always been penny stocks. There's always been the pink shades, the buckets shops, or whatever they called, were there for a very long time. There was the curb market where people were just trading, like, maybe the era in which the stock market is like this very serious thing. And like, maybe that was, maybe that's kind of the exception.

• 54:17Tracy Alloway?

  Is the theme of this conversation just give up, basically?

• 54:20Joe Weisenthal?

  No, I'm just saying, like, I'm just saying, like, maybe, maybe there's something to this idea. It's always, all these markets have been a little bit of a, there's been a, there's been a, I don't know what, uh,

• 54:31Tracy Alloway?

  What word are you gonna use here?

• 54:32Joe Weisenthal?

  I don't know. Not seedy, but all entertain, I don't know, like,

• 54:35Tracy Alloway?

  Embrace the seediness.

• 54:36Joe Weisenthal?

  Yeah, something like that. Yeah.

• 54:38Tracy Alloway?

  Okay. On that note, shall we leave it there?

• 54:41Joe Weisenthal?

  Let's leave it there.

• 54:42Tracy Alloway?

  All right. This has been another episode of the Odd Lots Podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.

• 54:47Joe Weisenthal?

  And I'm Joe Weisenthal. You can follow me at TheStalwart. Follow our producers, Carmen Rodriguez at Carmen Armin, Dashell Bennett at Dashbot, and Kell Brooks at KellBrooks. And for more Odd Lots content, go to Bloomberg.com/oddlots, where we have a daily newsletter and all of our And you can chat about all these topics 24/7 in our Discord, discord.gg/odlots.

• 55:08Tracy Alloway?

  And if you enjoy Odd Lots, if you like it when we talk about prediction markets, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.

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