New CFTC Chairman Michael Selig on How to Regulate Prediction Markets

We are rapidly entering a world in which there are odds on virtually everything. During the recent Super Bowl, the big prediction market platforms didn't just offer bets on the game itself, but also on more exotic facets, such as the first song that Bad Bunny would sing, even who would join Bad Bunny in the performance. And while a lot of people thinks this looks like gambling, it's actually regulated by the CFTC, an agency created in the 1970s to regulate derivatives. On this episode, we speak with new CFTC Chairman Michael Selig, who was nominated by President Trump and took his position in December. We talk to him about his philosophy, and why it is that these new bets are regulated as financial instruments, rather than gambling products. We talk about the tension that emerges when 18-year-olds can place bets on sports via prediction markets, even though in many states have laws on sports gambling, either banning it outright, or requiring participants to be at least 21. We also talk about crypto regulation, and whether perpetual futures -- which have exploded in the crypto space -- could soon be coming to traditional markets. Read more:Jump Trading Poised to Gain Stakes in Kalshi and PolymarketGambling Stocks Sag as Prediction Markets Steal Super Bowl Bets Only http://Bloomberg.com subscribers can get the Odd Lots newsletter in their inbox each week, plus unlimited access to the site and app. Subscribe at bloomberg.com/subscriptions/oddlots 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

• 1:07Speaker 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.

• 1:51Speaker 02

  Bloomberg Audio Studios, podcasts, radio, news.

• 2:06Joe Weisenthal?

  Hello and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

• 2:11Tracy Alloway?

  And I'm Tracy Alloway.

• 2:12Joe Weisenthal?

  Tracy, did you watch the Super Bowl? You know I was gonna ask that, didn't you?

• 2:15Tracy Alloway?

  I knew it. Actually, I was gonna start exactly the same way. I did watch the Super Bowl, and so I feel empowered to ask you a very controversial question.

• 2:25Joe Weisenthal?

  Oh, yeah.

• 2:26Tracy Alloway?

  Not which halftime show you watched, but

• 2:30Tracy Alloway?

  did Cardi B perform at the Super Bowl?

• 2:33Joe Weisenthal?

  Oh, right, because this was a big thing. I forgot that there was, you know what? I'm aware of various sort of questions about prediction markets and things that people place bets on. Well, how did that resolve? What was, what was the basic issue here again?

• 2:47Tracy Alloway?

  So I think it's still being resolved in various ways, but Cardi B, she was on set during Bad Bunny's, you know, extravaganza, and she was kind of like dancing and singing along, like mouthing words, at least, along with other people like Pedro Pascal and Jessica Alba.

• 3:04Joe Weisenthal?

  Yeah, Lady Gaga.

• 3:05Tracy Alloway?

  Well, Lady Gaga was like singing, singing.

• 3:07Joe Weisenthal?

  Yeah, you're right, you're right, you're right.

• 3:08Tracy Alloway?

  So the only reason this matters at all is because of prediction markets. So there was a bet, will Cardi B perform?

• 3:16Joe Weisenthal?

  Yeah.

• 3:16Tracy Alloway?

  And now the question is, does standing onstage and kind of bobbing your head and mouthing words count as a performance? Polly Market says it does. Kalshi says it doesn't.

• 3:27Joe Weisenthal?

  Oh, interesting. Yeah, there you go. Kalshi and Polly Market split over whether Cardi B performed. That's a great tension. I like that. It was striking to me, setting aside that I actually somehow seemed to have missed the specific thing, like how much prediction markets are now just part of the consumption experience, you know, even you look at all these different things that people are talking about, is Lady Gaga gonna show up somehow, like someone made a bet on it before it went public. But also, just like with each score, you know, you check the line. It's like, how much did this move the expectations of whether the Seahawks are leading? Like, prediction markets are truly becoming part of like pop culture and how we interact with pop culture.

• 4:07Tracy Alloway?

  There were some weird bets around, like color of Gatorade that was gonna get dumped on the coach.

• 4:12Joe Weisenthal?

  Yeah.

• 4:13Tracy Alloway?

  Length of like The National Anthem being sung.

• 4:17Joe Weisenthal?

  Yeah.

• 4:17Tracy Alloway?

  Did you see that? Like, I was tempted by some of those, but I stayed away.

• 4:22Joe Weisenthal?

  I'm still, I haven't used Polymarket or Kalshi, probably was. You know, the interesting thing too is like how much the mood has swung, right? Cause a few years ago, like, I don't know, 2022, 2023, I think we did an episode, like, at that time, like, there was almost nothing. And the sort of like regulatory 180, the degree to, the liberalization of these markets has been pretty remarkable, even, you know, going back to a year and a half ago, there was just a polymarket and it was just the offshore version that you had to fund with stable coins.

• 4:54Tracy Alloway?

  Yeah.

• 4:55Joe Weisenthal?

  And now it's like exploded at the time, you know, Kalshi was very limited, they didn't have US access, et cetera, or very curtailed US access. Anyway, they're here and everyone's trying to wrap their heads around where this is all going and stuff.

• 5:08Tracy Alloway?

  Yeah, it feels like they're much more sanctioned, I guess, than they used to be.

• 5:12Joe Weisenthal?

  Yeah, yeah.

• 5:12Tracy Alloway?

  But that said, there are still some issues that people are trying to work out. You have ambiguous outcomes, like, did Cardi B actually perform? You have concerns around insider trading, although not insider trading per se, because we're not talking about securities contracts, but maybe people with insider info who inadvertently disclose something material. I was thinking about this actually, so you can also bet on which companies are going to run Super Bowl ads.

• 5:38Joe Weisenthal?

  Oh, yeah.

• 5:39Tracy Alloway?

  And a lot of people must know if a company is going to run an ad like that. You have like the agency, the actors, like everyone. And you could argue maybe that that's material, non-public information, right? You run a Super Bowl ad, you get a bunch of attention, maybe your share price goes up if you're publicly listed.

• 5:56Joe Weisenthal?

  Yeah.

• 5:57Tracy Alloway?

  I don't know.

• 5:57Joe Weisenthal?

  There are so many things. Anyway, rather than us just keep talking about them, because we could talk for an hour, we really do have the perfect guest. We're going to be speaking with Mike Selig. He is the new chairman of the CFTC, the main regulator for prediction markets, who just sworn in in December. We're going to talk all about this, maybe some crypto as well. So, Mike, thank you so much for coming on Odd Lots, coming into the studio.

• 6:20Speaker 04

  Glad to be here.

• 6:21Joe Weisenthal?

  Why don't you tell us a little bit about just broadly coming into this new role? Like, what are your goals here with the CFTC?

• 6:29Speaker 04

  Well, we're really at a pivotal moment. You mentioned prediction markets, crypto, AI, all manner of new technologies and products that are impacting our markets. And the CFTC was really this kind of little-known regulator before the financial crisis, regulating the futures markets. It has expanded jurisdiction now over the swaps markets, the overcount of derivatives markets. And now we see so much innovation in that space with things like prediction markets and crypto with legislation on the verge of hopefully being on the president's desk. And so the agency is really at this unique moment where it has the opportunity to shape the future of these new and emerging markets, and it's a really exciting time to be in the seat.

• 7:09Tracy Alloway?

  Do you have an opinion on whether Cardi B performed at the Super Bowl? I mean, it's funny, but it's also kind of relevant because I saw someone has actually filed a complaint to the commission about Kalshi's decision specifically.

• 7:21Speaker 04

  Well, of course, we're spending a lot of resources investigating whether Cardi B performed. I'm just kidding. Really, our focus here is on the markets. So the unique thing, the great thing about the way that we regulate the markets is that the exchanges themselves, similar to on the security side, are self-regulatory organizations. So each exchange has its own rulebook that's been approved by the agency. It has its own requirements for contracts that are certified on the exchange. So of course, the Cardi B contracts went through a self-certification process, and then they're settled in accordance with exchange rules. They go through a clearinghouse as well. So the exchanges each have these rulebooks and certain requirements around how the contracts are resolved and settled.

• 8:02Speaker 04

  And of course, now we're seeing some differences amongst Kalshi's rulebook and Polly Markets' rulebook. But that's the great thing about our markets and having the ability to build a business, to develop an exchange with some flexible guardrails on top that the agency oversees, but we don't prescribe exactly what has to be in the rulebook. We have a principles-based system of regulation.

• 8:21Joe Weisenthal?

  What is the basis for something like, is Cardi B going to perform at the Super Bowl halftime show? What is the basis for this being categorized as a true financial instrument regulated by the CFTC? Because it certainly just feels like prop betting to me.

• 8:38Tracy Alloway?

  Who has economic exposure they need to hedge to Cardi B performing?

• 8:42Speaker 04

  There's a really interesting historical story around the definition of commodity and the markets that we regulate today, starting back in the 30s when the the Commodity Exchange Act was first ratified. It was originally focused on grain, and over time, we've had things like pork bellies. Come a long way. Exactly. It's come a very long way, of course, with the financial crisis. We got all manner of new products within our authority. But the definition of commodities extraordinarily broad. It includes virtually everything except for a few things that have been carved out: onions and motion picture box office receipts. And that's a really important point to note, that they were expressly carved out. So most things in our commerce today, even securities are technically considered commodities under our act, and we have authority to regulate

• 9:26Speaker 04

  them. In the case of securities, we coordinate with the SEC and have some joint authority. But for all other types of products, services, rights, indices, people are going to hedge that risk. They're going to be in the market to speculate on those products. And so we don't merit regulate. We don't tell people what they should be entering into contracts on. We create rules and regulations around those markets to make sure that they have integrity, that they're resilient, that they're vibrant, and they have guardrails and investor protections. And so that's why, going back to the exchange rulebooks and other controls, self-certification being an important process, we're making sure that those markets are safe and secure. But we're not telling people whether to trade pork bellies or Cardi B contracts or anything else.

• 10:07Tracy Alloway?

  So let's go to the insider trading question, because this is sort of top of mind for a lot of people. Technically, it's not insider trading, but you know, it does look like some people have inside knowledge sometimes when they put on big bets on something that just happens to happen the next day. The CFTC hasn't, as far as I know, given a lot of guidance on this issue. How are you actually thinking about it?

• 10:32Speaker 04

  Well, from a legal standpoint, I think there's a bit of a misunderstanding about the insider trading doctrine at the CFTC. So the authority at the agency is very similar to the authority at the SEC. Under our anti-fraud, anti-m manipulation rule, we do have authority to police insider trading in the commodities markets. Now, the way that insider trading is carried out is oftentimes diff- From a situation where you have informational asymmetries relevant to a company. But there are situations where you have informational asymmetries related to the markets, placing a trade ahead of a customer, for example, or even in this this situation now with prediction markets. And that's something we are thinking about and certainly on the beat and exploring. So we surveil the markets, we collect data, we have information about,

• 11:15Speaker 04

  for example, you know, our players participating in these markets, our people associated with the sports leagues, et cetera. And so we are a cop on the beat in that regard. So the doctrine is not entirely different, but there are some nuances that we're aware of and making sure that we're policing for.

• 11:45Tracy 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.

• 12:12Speaker 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.

• 12:55Speaker 01

  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.

• 13:35Joe Weisenthal?

  Would Polymarket or Kelsey, in your view, be allowed to livestream a video of a giant roulette wheel and let people trade futures on when it lands on red or black?

• 13:47Speaker 04

  Some of these types of gaming, where it's really a game of chance and not a game of skill, there's definitely a difference. And I think when we look at what's a commodity, it's possible that you could construct some sort of contract, an esoteric derivative. But really, the underlying in a game of skill is very different. There's a clear economic risk associated. For example, at the Super Bowl, it's a good example. There's a ton of economic activity associated with that. There's hotel revenue that comes from it. There's vendors, there's activity within the city, tourism, all of that. And so there's a real reason to hedge that risk. With a game of chance, it's harder to say. It's possible you could construct something, but it's less likely that that's a real underlying.

• 14:29Joe Weisenthal?

  Well, like, what is like the difference? Because, you know, let's say it's, what is Bad Bunny's first song going to be at the Super Bowl? Like, what is the difference between that, which doesn't really seem any more economic than, you know, a roulette wheel and whatever it is?

• 14:43Speaker 04

  Well, to be clear, there's no requirement in the act that there has to necessarily be some merit-based result from a contract. I do think with a lot of these information markets, these prediction markets where they're forecasting a potential outcome in the future, they produce a lot of useful information. We are seeing newsrooms and corporate prediction markets. We're seeing sports live broadcasts and corporate prediction markets. We're seeing the information used in particular. A great example is the election in 2024 where the President, I had a very large victory and that was not necessarily forecast in many of the polls. But of course, the prediction markets got that right. So it's something that I think is valuable to society. The question of having regulation around that's a separate question. I think that's an important one.

• 15:27Speaker 04

  We are certainly taking on that task and making sure that we don't let these markets languish or that we don't push them offshore. But we develop the right rules and regulations to develop investor protections and make sure that the markets are flourishing here in the United States.

• 15:41Tracy Alloway?

  Since we're discussing prediction markets through the medium of the Super Bowl, and you mentioned players as well, looking at player behavior. If a player were to place a bet on, I don't know, a specific play during the game and then they did it themselves, like something that they actually have agency over, would that be something that you would investigate or look into?

• 16:04Speaker 04

  You know, I think it's all facts and circumstances. So we'd evaluate potentially to the extent that there's insiders that are involved in the markets. We get that data. We're actually talking to a lot of the sports leagues. We're talking to participants in the markets to make sure that we are on top of things, have information about who is able to be participating in these markets, who's not. We do have at the exchange level, the exchanges are really the first line of defense and they are surveilling the markets. They're doing KYC on their customers. And so that's certainly something we're on top of and we'd consider and evaluate on a case by case basis.

• 16:37Joe Weisenthal?

  Why isn't trading sports derivatives gambling or betting? Or is it betting?

• 16:42Speaker 04

  Well, there really is an interesting history here. So if you go back to the 30s, national grain betting was a thing, right? And that was considered a national pastime. And so for as long as we've had derivatives markets, we've had these so-called bucket shops, which were these off-exchange markets where people were just placing bets against the house on the future price of a commodity. On the other hand, you had organized exchanges. So the Chicago Board of Trade, later CME and others, had organized markets with market integrity. They had derivative instruments contracts where you actually were in a contract with another person. And then now in our markets, we have a clearinghouse novating and standing in the middle of those contracts. But you have a buyer for every seller. With the kind of bookie model, that's not the case.

• 17:27Speaker 04

  You're betting against the house. And there's a lot of different rules when you're betting against the house. You don't have the liquidity of being able to offset your position or sell out of your position. You're kind of stuck taking whatever the bookie is giving you. And some of the odds are very different. So you're actually facing the odds of the bookie as opposed to here where the contracts go up and down in value based on actual market activity. And so over time, the Supreme Court actually blocked some of this bucket shop activity by saying, you can't take the price quotations from the organized exchanges and use them in a bucket shop. But a lot of these bucket shops over the years have now moved into gaming and other things. We're seeing really the same phenomenon where we have casinos and other operations that are operating lawfully under state requirements and regulations, but they don't have the same sorts of controls.

• 18:12Speaker 04

  You know, we regulate a nearly 500 trillion notional market with the swaps market. We have very stringent requirements and controls around our exchanges. And these contracts reflect that. They go through a very stringent process of self-certification. They can't be readily susceptible to manipulation. We surveil those markets. We police things like insider trading. And so it's a much more robust scheme on top of these markets, much higher stringent requirements. And so I do think we're seeing a lot of parallels between the 30s and 40s and today. But rest assured that we're on top of these markets. And these have the same sorts of investor protections that you would expect in the securities markets and in our futures markets.

• 18:51Tracy Alloway?

  Out of curiosity, how much of your time is split now between the new stuff, prediction markets, crypto versus the, I guess, the old boring futures exchanges? Yeah, old five.

• 19:02Speaker 04

  Well, our day to day is really the traditional markets. So and when we talk about these new markets, many of the incumbents are getting into the space as well. We're seeing more and more of these products offered on our traditional DCMs. But all of these are the same registration category, right? There are some nuances in how they're set up. There's some no action relief that's been given to some of these platforms historically. But this is not, it's not, you know, our day to day bulk of work. That said, given that it's new and given that there's so much that is changing, we have Have a lot more rulemaking and policy work to do in this space. So I do think it's a big piece because of that. But in terms of the actual size of these markets compared to our, as I said,

• 19:45Speaker 04

  about $500 trillion notional swaps market, $40 trillion notional futures markets. It's a smaller piece, but it's growing. And I think blockchain is going to really change in particular how some of these existing exchanges operate, how they settle transactions and so forth. And so it's a really exciting time to be in the seat.

• 20:05Joe Weisenthal?

  So I get that there are some market structure differences between a futures exchange on sports versus the traditional house sets the odds and so forth. But from the perspective of the user or the person who's putting money on the line, like I think most people would say like economically, they're very similar. And they're getting more similar because we know that say like the Kalashian Polly market, they're trying to get into to do parlays and stuff. So like it's getting closer and closer. And you know, people have a lot of concerns about sports gambling and the effect that that has on young people and so forth. National legalization of these, it de facto lowers the age in a lot of states. Because in a lot of states, the legal age to gamble is 21

• 20:49Joe Weisenthal?

  and the legal age to trade a future is like 18, I believe. Do you think that's good that we've de facto lowered the age to bet on sports?

• 20:57Speaker 04

  Well, again, we're not merit regulators. We don't pass judgment on kind of the age requirements in our securities markets and our derivatives markets. We have certain standards that have been upheld. These markets, people are betting on, you know, any number of assets, right? If you want to call it.

• 21:11Joe Weisenthal?

  But it is overwhelmingly sports.

• 21:13Speaker 04

  I mean, I think that said, you have the ability to make investments and trade options in all manner of securities, all manner of commodities. And so the rules are not different based on being sports or this or that. You know, I think this term betting has been used and thrown about in our securities markets and our derivatives markets as well. And I don't think it necessarily means anything in particular, but the notion is that you're able to make decisions at 18 in our markets. And we uphold that state by state, some of the standards have been set even higher. And and that is not something that, you know, I have a particular opinion on. I think that's just the way.

• 21:48Joe Weisenthal?

  When you say, sorry, what do you mean in state by state, some of the standards?

• 21:51Speaker 04

  Some of the states have flexibility in what they set up for drinking or for, you know, gambling and the like. This is financial market activity. These are not wagers. You're not betting against the house. We have significant overlay from a regulatory standpoint over these markets. And so we're not gatekeeping particular categories of markets, elections or sports, and having different standards. That's not how we've typically done things. And so we don't intend to do that in this particular market.

• 22:18Tracy Alloway?

  So you're not a merit based regulator, but you are a technical regulator. And as we've been discussing, there's a lot going on, lots of rulemaking to do, lots of potential enforcement actions. There's a Baron story out today talking about how the CFTC apparently has no enforcement officers left in its Chicago office. And you used to have 20, but everyone resigned, it seems. How are you balancing all these new markets, which are growing really, really fast and pose some very thorny questions that we've been discussing with more limited resources?

• 22:55Speaker 04

  Well, look, a lot of the the folks that left, that was before my tenure and certainly, you know.

• 23:00Joe Weisenthal?

  We're not blaming you.

• 23:01Speaker 04

  It's not, you know, they didn't leave right after I joined, right? But no, I think it's a serious question, right? We've got to make sure that we have adequate staff to police the markets. And we do have a ton of staff throughout the country. And, you know, to the point of our Chicago office, of course, it's important that we have folks within that office, but we don't have a Texas office. We don't have a Florida office. We don't have offices in every state. We have a handful of offices. We've got a critical mass in DC and a number of folks in New York as well. And those are our two largest offices. We continue to fill those out and we would love to have more people in Chicago. And, you know, the door is always open for folks that want to come in and work for us. And we continue to build out the ranks there. But we have adequate resources. We have a ton of folks within each of our offices.

• 23:45Speaker 04

  And we're actually leveraging a lot of the new technologies like AI to make sure that we're surveilling the markets and that we're reviewing things like insider trading and bringing cases where it makes sense. We're also processing applications very quickly. We just processed, I think, in a record time of 200 days, one of the more recent exchange applications. So we're really well staffed, but we're continuing to build that out and make sure that we have good people in the building who are competent and able to to make sure that we protect our markets.

• 24:12Joe Weisenthal?

  So you have the funding to add headcount and are you pursuing like building out the headcount? Do you need more funding?

• 24:20Speaker 04

  Absolutely. So we are actually staffing up.

• 24:22Joe Weisenthal?

  Okay.

• 24:22Speaker 04

  So 100% we're building that out. We have adequate resources to do so, but I want to be clear that we have a very well-staffed building and we are very much on top of things within, you know, these questions around not enforcing and surveilling, you know, I think there's a little bit of fake news there. We probably should put it up to a prediction market, but, but I do think that we're on top of things.

• 24:42Tracy Alloway?

  So one thing I know about the Trump administration, they're big fans seemingly of cutting costs, cutting spending, streamlining the federal government in some ways and, you know, sometimes cutting agencies altogether. This has been a really long-running question in market structure world, but why don't we just combine the CFTC and the SEC?

• 25:05Speaker 04

  It's everybody's favorite question. Look, the CFTC and SEC are very different regulators. So the SEC is a capital markets regulator. They're focused on somebody wants to go raise capital for a great idea. Other people want to place that capital somewhere. There needs to be some regulation over that. After the Great Depression, there was a lot of chaos in the markets and the agency really was a great answer to that issue and has put a great regime in place to regulate all of that. The CFTC grew up actually at a different time. The original act was in the 30s, but later on, the CFTC was established in the 70s. But the purpose of the CFTC is to regulate risk mitigation, risk management, very different

• 25:45Speaker 04

  areas. So there are firms that whether farmers, ranchers, energy producers, now we have data centers in the AI space, but, but all manner of businesses have a bunch of risk related to the inputs for their business and ongoing operations and they need to hedge that risk. And there are other participants that want to supply liquidity into those markets, make markets or speculate. And the CFTC regulates that. So very different purpose for the regulator. There's not the same sort of disclosure regime that we have with the SEC. And so it makes sense to have two separate regulators, but what doesn't make sense and what Chairman Atkins and I have been very clear on is the lack of coordination between. The agency. So it's coordination, not consolidation.

• 26:26Speaker 04

  We need to harmonize the two regimes to make sure that there's not inconsistent and incompatible rules and that there's not gaps. So Chairman Atkins has referred to this no man's land between the two agencies where you've got the bodies of all these dead products and services that otherwise could have been if the agencies could just figure out how to coordinate. Security Futures is a great example. We have shared jurisdiction there, but we've really failed to work well together to get that off the ground. And so I think it's really a new day at both agencies where we're intending to work closely together on that.

• 26:59Tracy Alloway?

  Yeah, this is exactly what I wanted to ask. So I've heard people talk about increased cooperation and coordination between the SEC and the CFTC, basically ever since the financial crisis. And it hasn't really happened, or it hasn't happened to the degree that some people would like to see. What's your diagnosis of the actual problem there? And I would love to get into the weeds here. And, you know, like, what does coordination look like between the two agencies?

• 27:28Speaker 04

  Yeah, I mean, I'm in a good position that I used to work for Chairman Atkins. But, you know, so I think we have a great relationship, just getting off for the start. But a memorandum of understanding is something that we've committed to execute, and we're looking to execute very soon. And that really set all the ground rules for coordination between the staffs. And so not having that in place, I think, has really hampered the two agencies, because sharing information is really important. You need a framework for sharing that information. There's a lot of non-public material that is generated in each building. And so having rules for the sharing of that information is important. Having regular meetings between the staffs and coordination and sharing of market data related to registrants is really important. So if we've got dual registrants, and we're collecting our own sets of information,

• 28:13Speaker 04

  and we're ensuring that they're each complying with these two kind of separate fortresses of rules and regulations, how do we know who's doing what and what needs to be changed? And so having the information is really important. That's the first step. And then the staffs need to come together and figure out how to create substituted compliance. So certain rules are incompatible. On both sides, we need to knock those out or at least have a kind of default choice, one agency versus the other. If you're a broker dealer and you're doing a very minimal amount of commodity derivatives activity, perhaps you should have a primary regulator at the SEC with some CFT overlay to make sure that there's no gaps. So that's an important piece. I think a lot of the general like crypto

• 28:56Speaker 04

  related issues are really calling for joint rulemaking, joint work between the agencies because we're seeing Nvidia tokens on chain, not necessarily within the US, but I think now with the DTC, we're going to start seeing a lot more of the tokenization of of public equities. And then we're also seeing Bitcoin, Ether, things that are within our territory, trading on chain, and those worlds are going to collide. And then they are in fact colliding today. And so having common ground between the agencies, figuring out what the ground rules are, and making sure that we have similar standards for decentralized finance and for digital wallets and all of that's really important. Because if we set incompatible standards, then it's going to be a real disservice to the

• 29:39Speaker 04

  market and that's going to harm all Americans.

• 29:43Joe Weisenthal?

  Kelsey had an ad recently, it said POV is a girl and it said POV, I was about to be unable to pay my rent, but I got two years of rent through Kelsey's predictions. It's amazing. This is seems more aggressive even than, you know, the traditional sports betting and there's all kinds of sports betting ads and then they have a thing where it's like, if you're a problem gambler, call this number. Should there be any limiting factor on how aggressively sports these prediction markets should be advertised?

• 30:12Speaker 04

  Well, that's one point that I think is is worth double clicking on in the sense that there are standards for futures commission merchants for brokers within our markets. And some of those standards are relic essentially of the way that the act and the regulations developed where you have an intermediation between the customer and the clearinghouse and the exchange typically in our markets. Now, these no action letters that started around 2000 that were given to some of the Prediction markets back then.

• 30:44Joe Weisenthal?

  Yeah.

• 30:44Speaker 04

  As well as now other markets, cut out the FCM, cut out the broker. And so you had direct to the clearinghouse, direct to the exchange. And that model doesn't have all the same rules and regulations. And so something that we're thinking about is how do we make sure that we have consistent standards across both? Now, I think this question of what sort of marketing and advertising either should be able to engage in is one that we're certainly going to think about.

• 31:09Joe Weisenthal?

  Sorry, just to be clear, there are current rules on, say, a futures broker and how they can market. But when these no action letters were established that allowed the sort of the futures entity itself to offer directly, they didn't have the rules. What are the rules? And would an ad like these, like if a futures broker, like, I don't know, I forget MF Global or something like, oh, I couldn't pay my rent. But then now I'm, you know, now my, now I'll never have to work again because I traded wheat futures. That seems a little weird and I've never seen an ad like that.

• 31:40Speaker 04

  Right. I mean, it really is this result of the way that these no action letters were handed down, as I said, many, many years ago. And this kind of regime that we have that really, my view on a lot of this stuff is that we need clear rules of the road. We need to do things through notice and comment rulemaking and actually think holistically about our markets. And not focus on these little patchwork no action letters, which unfortunately has been the rule over many years. And so that's definitely something we're thinking about. We want to set clear standards. We want stakeholders at the table to figure out what these regimes should look like. And I'm not one necessarily to say what the marketing should look like. We want to hear from participants as to what sort of marketing they think is appropriate for these markets. But we're certainly thinking about that and there are different standards.

• 32:22Speaker 04

  It really is just a result of the, that kind of ad hoc way that regulators in the past have gone about establishing exceptions for certain things in the markets.

• 32:32Tracy Alloway?

  Well, on this note, do you maybe need new classifications? Cause it seems like all these different worlds are kind of melding together where you might have a crypto trading platform that's now offering derivatives and other things. And then you have like an old school exchange that is offering essentially bets on like number go up, number go down. At the moment, I think your registration categories are pretty like. Standardized and you have three of them? Is that right? Like futures exchange, swap execution, stuff like that?

• 33:04Speaker 04

  No, we've got too many. We've got many.

• 33:05Tracy Alloway?

  Okay.

• 33:05Speaker 04

  Many more.

• 33:06Tracy Alloway?

  All right, more than that. So could you create even more to sort of encompass the industry changes that we're seeing?

• 33:13Speaker 04

  Well, we certainly need to think holistically about what requirements we have on different participants. So these non-intermediated exchanges, and we're also seeing a lot of vertical integration with a single business owning a clearinghouse, an FCM, the broker and the exchange. We're seeing different models where there's the non-intermediated, as I said, we don't have an FCM at all, and then you have everything in between. And so we need to think about that. We need to make sure there's consistent standards. We don't want a regulatory arbitrage where because you don't have the broker, you're able to do more. Now, the way that these have been set up under no action letters today, they do not allow for any margin. So they're fully collateralized. And so if you go directly to the clearinghouse as a customer, you're putting up full collateral.

• 33:58Speaker 04

  And so that's something as well, where we're seeing more institutional interest in these markets. They would prefer to be able to put up margin and go through a broker or have a model where you don't have the broker at all, but you're able to use margin. So we're thinking about all these things. It's a really interesting time, as I said, to be thinking about market structure for things that really just probably should have been done many years ago. And for whatever reason, people relied on these no action letters. And really, I guess it was more of an ankle biter at the time and didn't get a full regime. But we're thinking about all of that.

• 34:47Speaker 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,

• 35:31Speaker 01

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• 36:10Joe Weisenthal?

  Donald Trump Jr. is an advisor to Kelsey. He's on the board of Polymarket, and it looks like Truth Social, which is largely owned by President Trump, is also going to launch something called TruthPredict. How should the public feel comfortable that these are well-regulated markets, given the very obvious stake that the president and his family has in this industry?

• 36:32Speaker 04

  These are designated contract markets like any other. We've regulated these markets for many, many years, for decades. They have some of the most stringent regulatory requirements, as I mentioned. These are nearly $500 trillion notional markets that we regulate. We take it very seriously. We police fraud and manipulation in these markets. So I think everybody can rest assured that we are on top of protecting the markets, and we think it's great that there's a broad swath of interest in the markets.

• 37:03Joe Weisenthal?

  But like, so for example, when you're figuring out like, what is the appropriate level of advertising, going back to those Kelsey ads, and you're thinking like, okay, like, talking to market participants, like, who is that? And like, how should people feel comfortable that you're going to find that right line, again, when the administration has like, a very clear economic stake in this industry and having the industry grow?

• 37:27Speaker 04

  We adhere to the law. I mean, the Commodity Exchange Act is our authorizing statute. We act in accordance with the Commodity Exchange Act. I mean, very strict ethics and, you know, government requirements, and as does, I think, everyone in this administration. So we take all of that very seriously.

• 37:41Tracy Alloway?

  So, speaking of Trump, we should talk a little bit more about crypto, because it's been having a pretty bad month so far. And I think one of the big hopes of the industry, the Clarity Act, seems to be stalled in Congress. What happens if that doesn't go through? Because you've sort of, I feel like you've committed yourself to being, you know, a crypto digital asset friendly regulator in many ways.

• 38:08Speaker 04

  Well, thanks to the president's leadership, I really do think we're at a critical moment where we've got Genius now has law, regulation by enforcement's done, we've got the Clarity Act that's really on the precipice. I think there's a few issues that are being ironed out, actually, as we speak. I know there's a meeting today, and we're hopeful that that's going to get done. I think that's going to set a really future-proof framework for crypto here in the US. We can't allow European countries and others to lead in this area without US involvement and leadership. And so, we're committed to getting that done. I think we've got a really great bill that's almost at the finish line. If it doesn't get done, look, I think there's a lot of authority that the agencies have, but it's

• 38:53Speaker 04

  important with Loper Bright and some of the case law that takes a little bit of the agency's discretion over nuances in the statute, and puts that back to Congress and the courts. I think it's really important to have more baked into the statute than not, and so we're hopeful that we'll get a statute in place.

• 39:11Joe Weisenthal?

  You know, one of the areas that crypto seems to have been at the forefront of is perpetual futures and, you know, it's very popular. You see like you can get 101 leverage trading ETH futures on some platforms. Do you see the more use of perpetual perps in a sort of traditional finance? Could we have perpetual oil futures at some point? Like, could you envision that?

• 39:34Speaker 04

  Well, right now, we're thinking about it in crypto. I think the real-

• 39:37Joe Weisenthal?

  But like, you know, trade it on-chain like oil futures. Like, again, if we're like, okay, crypto provides the infrastructure, but could you, like, why not trade an oil perp on-chain?

• 39:48Speaker 04

  Look, if there's demand for these products, it's definitely something that we'll consider and look at. Right now, the overwhelming demand's been in the crypto space. We've seen some demand in precious metals, gold, silver. We have to consider the susceptibility of each contract to manipulation. So there might be unique considerations around a contract that doesn't have a physical delivery date. For example, pork bellies or other things, and that can create issues within the supply and liquidity for the futures contracts. So something we're thinking about. We're definitely excited about all this innovation. It's been too long that this stuff has only developed offshore, and we really want to bring it back with clear rules of the road. So it's really important that the US leads

• 40:32Speaker 04

  and that we set the standard that other countries are going to follow, rather than just allow this stuff to flourish offshore with potentially less regulation. You know, as you all know, when you offer into various countries, there's different rules around offering directly in or solicitation, reverse solicitation, all of that. So we're certainly aware of that. We're thinking about it. We want to set really clear and kind of best-in-class standards for US markets.

• 40:58Tracy Alloway?

  Just going back to prediction markets, I know you keep emphasizing that you're not a merit-based regulator, right? So you're not making decisions on what people should be betting on or what they can bet on. But is there like- Is there a line at some point that you wouldn't want to see private companies actually cross? Like if someone creates a contract for like, someone's gonna die, right? A violent death or something, that would seem problematic.

• 41:25Joe Weisenthal?

  Or a contract, and this came up when we talked to Don Wilson in Chicago, the contract for whether people would throw sex toys onto the court during a WNBA game, which of course, the existence of the contract might elicit people to do it, change their behavior, also kind of dangerous. Like, where's the line?

• 41:43Speaker 04

  The latter seems highly at risk of, you know, being susceptible to manipulation, which we do have authority to reject. I think with other categories, assassination and the like, there is authority within our statute to prohibit. So we would exercise that authority. You know, there's certain areas where we certainly would not want contracts being offered. But with others, look, we're not, as I said, a merit regulator. We're not gonna go and say you can't have a contract in sports, you can't have a contract in politics, but the details matter, and we are evaluating that.

• 42:14Joe Weisenthal?

  Just going back to, you know, the sort of basic question, a lot of states attorneys generals are attorneys general, did I say, did I pluralize that? Attorney's general? A lot of states attorneys general, you know, there's a lot of court fights about this. And they look at this, and like many people would, and they say, look, this is, this is betting, this is, this is gambling, this certainly looks like sports gambling. Kelsey himself ran ads that said, sports betting is now legal in your state, and I think they've pulled those back, et cetera. But from the perspective of the public, it certainly looks like by putting sports betting into this framework, that it's undermined the ability of states to like, set their rules about who can bet on what.

• 42:53Speaker 04

  Well, there's a great Law Journal article by Professor Hazen, he's a securities law professor. This must have been written in the early 2000s, but it was before the financial crisis, comparing derivatives, futures contracts, securities, insurance products, gambling, these are all products that you can take similar economic positions in, but they have different legal treatment. And it's because the products are structured different ways. So an insurance contract could be structured very similarly to a credit default swap, but you have an insurable interest. So the details do matter, and we are looking at that. So it's not the case that we're going into the casinos and saying you're offering legal off exchange swaps. But if the products are structured as swaps, then we have authority

• 43:38Speaker 04

  there. And so many of these Platforms that are offering products that may have some similar economic attributes, but the details do matter, right? As I mentioned, you can, you have to go through a clearinghouse. The products can be offset. You can get in and out of your position. There are differences.

• 43:54Joe Weisenthal?

  Do they matter? I totally get that, but do they matter from the perspective of like a 19 year old who's addicted to betting on sports?

• 44:01Speaker 04

  Well, I think that's a question for society as a whole and even for Congress, right? I mean, to the extent we don't want a 19 year old trading Nvidia stock options either, that's, that's something that you can talk to Congress about. But the reality is that today we allow 18 plus in our financial markets and there's responsibility associated with that. They have to go through a broker in many cases. There is this nuance of the non-intermediated model, but there's screening as well to be able to access those markets. And so we do have standards, we do have rules, everything's done in accordance with an exchange rulebook and we enforce that and we are policing those markets. But I think this, this more paternalistic question of what age should be the, the age

• 44:42Speaker 04

  should be able to participate in the markets, these people can be drafted, go off to war. And so a question of whether they can trade options on, you know, the outcome of the Super Bowl, you know, I think that's not really for the regulator to decide.

• 44:55Tracy Alloway?

  You know, you said you were ramping up staffing to, you know, help regulate all these new markets, new and fast growing markets. What's the hiring process or the hiring experience actually like at the moment? Because, you know, thinking back to last year, 2025, all the headlines when it came to government employment were, you know, layoffs, mass firing, streamlining. What's, what's that like for you now? Is it easy to get people in the door?

• 45:23Speaker 04

  Well, look, there are, to the extent there are areas where we need additional staff, we are evaluating based on competence and the highest quality. We do not want to just bring on bodies to bring on bodies. We're making sure that we're bringing on the right people for the roles. And in many cases, we are very well staffed. I think there are some needs that we're looking to fill out. But again, it's, it's very much akin to hiring at a private company. We're looking to bring on the best and the brightest who really want to help revitalize the agency, fill out needs for the agency. And we are, as I mentioned earlier, relying a lot on technology as well because there's just so much that many years ago really had to be done manually that can be done very quickly through new technologies.

• 46:06Tracy Alloway?

  Well, this has been a perennial question, which is how government agencies actually compete with the private sector to get good people. How are you doing that at the moment, given that, I mean, I imagine you have some form of budget constraint, and I would imagine that it's probably, your budget is not as big as like, I don't know, CMEs or something like that. How do you actually compete?

• 46:29Speaker 04

  Well, look, I think part of that's the mission. We are really interested in making sure that these markets flourish here in the United States. It's an exciting time. Many people are interested in being able to contribute to that effort. We're really, as I said earlier, setting new market structure for this asset class, as well as for blockchain-based markets. And a lot of the things that needed to be fixed in the wake of Dodd-Frank that frankly were never fixed. So I think it's in part mission, in part people that are willing to serve and come in, and maybe they don't get the salary that they get in the private sector, but that's not necessarily a bad thing. They get a lot of value out of being, working for the government.

• 47:10Joe Weisenthal?

  Going back to the question of like, marketing, and again, gambling marketing, there's always like some line or whatever about people who get addicted. Would you like Congress to come in and create rules? Should Congress come up with a rule about prediction market advertising?

• 47:26Speaker 04

  We have got a lot of authority to regulate our participants. I think there's sometimes a real need for Congress, to the extent, as you all mentioned, if you really want to set some sort of more paternalistic rule around, you have to be 18 or 21 to participate in the markets. That sort of thing, sure, you can talk to Congress about. With respect to the more nuanced pieces of how we regulate the markets, that's stuff that we handle. It's not typically baked into statute. We go through our notice and comment process and get input from the public on those sorts of things. So I don't necessarily think you need to kick everything to Congress within the details, but it certainly could be something that people...

• 48:05Joe Weisenthal?

  There are a lot of countries, you know, or sorry, a lot of states regard like, okay, under 21, like, we don't want that, right? And it sounds like you regard that as paternalism in action, which, you know, I understand a lot of people share that view, but, you know, it also seems like the CFTC, you know, people have different views, and it sounds like the CFTC is sort of undermining a value that a state might have about gambling.

• 48:30Speaker 04

  I don't view it that way. I do think our derivatives markets are a separate area within government and within the law as opposed to the state gambling. And the the rules and requirements that govern a state casino are just very different. They can do a lot different things than what a regulated futures exchange can do. And so I do think there's some give and take, some for sure limitation on the age piece. But look, you can serve alcohol in a casino and allow people to bet on sports. You can't do that necessarily at a digital exchange. Maybe somebody's got a beer on the side. But I do think there's a lot of different restrictions and a different environment in which people are trading. So it's not quite apples to apples.

• 49:14Joe Weisenthal?

  Mike Sealy, thank you so much for coming on Odd Lots. A perfect guest at the perfect time.

• 49:19Speaker 04

  Thanks for having me.

• 49:32Tracy Alloway?

  I enjoyed that conversation.

• 49:33Joe Weisenthal?

  Me too.

• 49:34Tracy Alloway?

  However, there are a number of difficulties with regulating prediction markets. And I'm kind of trying to like zoom in on what I think might be the primary one. So number one, the CFTC exists to regulate risk management, right? Which is what Mike said. It is very doubtful to me that someone needs to manage their exposure to Cardi B performing onstage at the Super Bowl. So it's not even entirely clear to me that like this is an industry that the CFTC should be regulating. Now, that said, that's a big tension, right? And

• 50:14Tracy Alloway?

  then just beyond that, you could certainly argue that by legitimizing prediction markets and helping them to grow, you are in fact introducing a new risk into the system because everyone's going to start gambling away, I don't know, their college funds or whatever.

• 50:33Joe Weisenthal?

  You know, I think Mike made an interesting observation sort of near the end of the conversation that like And that's totally true. Like, different market structures warrant different types of regulatory treatment, right? So, and I think that makes sense. I think what's interesting, though, about this conversation, particularly as it relates to sports betting, is that part of the reason that states have, sort of, in many cases, either no sports betting or very stringent rules about who can engage in sports betting, has nothing to do with financial risk and everything to do with the sort of like moral choice about who gets to sports bet. And so, you know, on one hand, it's like, okay, there's like traditional sports books. They have a house that sets the odds.

• 51:15Joe Weisenthal?

  It's definitely true that prediction market companies have like a different market structure. But from a sort of like, why does society want to constrain the role of sports betting? It is not because of like, any sort of like financial instability risk. It's because we don't want certain people, like 18-year-olds, people who might still be in a high school, having access to sports betting. And when the CFTC says like, you know, this is, this is a new type of financial instrument that should be regulated like a financial instrument, it sort of undercuts that sort of choice that the state has made.

• 51:45Tracy Alloway?

  Yeah, exactly. Do you think sports betting is like the new monoculture?

• 51:50Joe Weisenthal?

  It is really incredible how pervasive it is. And it's really incredible, but also it's just incredible, you know, truly how pervasive betting on everything is. And, you know, I should say, like, I, I'm an enthusiastic consumer of the prediction markets data. You know, like I said in the very beginning, like I, now and I, all kinds of things, including Fed decisions, you know, like, I think it's very useful to say, like, you look at like certain measures of like, I don't know, you know, the Fed fund swaps or whatever.

• 52:18Tracy Alloway?

  Why wouldn't you just look at WARP?

• 52:20Joe Weisenthal?

  I love WARP too, but like a simple, we have it on the Bloomberg now, Polly Market, will there be three rate cuts this year? That is also a useful instrument to have. But there are a lot of things that prediction markets have. And again, that A, aren't that, but I, you know, I like a lot of them. I like looking at election odds. I like looking at whether the odds of like, some company, what they're gonna, like, I think there's a lot of useful signal from them. It's also true that the platforms are largely sports betting at this point.

• 52:47Tracy Alloway?

  Right, right. How much signal do you actually need about? I don't know, the Super Bowl. I'm sure some people are really into it, but from a

• 52:56Joe Weisenthal?

  Yeah.

• 52:56Tracy Alloway?

  trading perspective.

• 52:58Joe Weisenthal?

  From a sort of, from a financial

• 52:59Tracy Alloway?

  Yeah.

• 53:00Joe Weisenthal?

  regulation standpoint, it's a different question.

• 53:02Tracy Alloway?

  Yeah.

• 53:02Joe Weisenthal?

  Anyway, and it's also true, by the way, that the Trump family is very invested, quite literally, into this space. And I think that quite reasonably should, you know, raise some questions about like, how policy is being made about the growth of this industry.

• 53:18Tracy Alloway?

  Incentives.

• 53:19Joe Weisenthal?

  Yeah.

• 53:19Tracy Alloway?

  For sure. All right. Shall we leave it there?

• 53:21Joe Weisenthal?

  Let's leave it there.

• 53:22Tracy Alloway?

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

• 53:27Joe Weisenthal?

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

• 53:51Tracy Alloway?

  And if you enjoy Odd Lots, if you like it when we talk about regulating 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.

• 54:42Speaker 05

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