Tracy: Hey there, OddLots listeners. Joe and I are very excited to announce that we will be hosting a live show in London on Thursday, May 7th.

Joe: 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 uh London one, and I'm really excited about it.

Tracy: Very exciting. So, if you want to hear some fantastic conversations being recorded live on stage, if you want to hang out with Joe and me, or if you want to hang out with other OddLots listeners, you should definitely save the date for your calendar, it's going to be at Wilton's Music Hall in East London again on Thursday, May 7th. Doors opening at 6:00 p.m.

Joe: And the key thing is, you know, every time we do a live show and they sell out, people complain like, "Oh, I didn't see the link. I wish I would have bought them sooner." We're going to be putting the link in the OddLots newsletter. So, go find the OddLots newsletter. Just search for it, subscribe to it, and the link will be there before it's anywhere else. So, uh this is your chance. Plus, if you like OddLots, 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.

Tracy: Hope to see you there.

Tracy: Hello and welcome to another episode of the OddLots podcast. I'm Tracy Aloway

Joe: and I'm Joe Weisenthal.

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

Joe: Yeah. 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.

Tracy: Yes.

Joe: Why prediction market 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 [laughter] 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.

Tracy: Yeah. No, I think there's a great point. I mean, I think you're being generous actually with the Avengers thing. I mean, maybe

Joe: 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 Kelshi, 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 the so the potential there in my mind for some of these things is obviously quite high. Well, you could say certainly in our current economic environment, being able to bet on things like is the US going to strike Car Island or something like that could be actually useful if you are a large institutional investor versus just betting on the price of oil or the direction of stocks or something like that. However, I have a hard time thinking that institutional investors are going to flock to a platform that contains questions that are both is there going to be a recession and also some completely out there pop culture kind of contract.

Tracy: Totally. Or you know obviously beyond the pop culture they're dominated by sports betting and so forth. So that's another question. Also, you know, the marketing tactics used by the major prediction market companies are very different than anything, pretty different than anything we see in traditional futures, etc. So, I think we both Yeah, like I do on a fully think that like there could be legitimate use cases where there are natural hedgers, natural liquidity providers for some of these like swaps, some of these pure binary instruments, etc. But there are some pretty big chicken and egg problems and other things to like actually get there where there's volume. You know, for example, some of the weather related ones. Absolutely. They're great. No one's 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.

Joe: 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 Pedy. 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 Thoughts.

Tomas Peterffy: Thank you very much for having me.

Tracy: 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 Cali or Poly Market versus someone with a lot of money who might be interested in trading in size.

Tomas Peterffy: 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 and less important questions. So it all depends on what you ask. So the stock market has Microsoft and Nvidia and also has you know the GameStop and other silly stocks right so it is a parallel situation so you cannot blame prediction market the mechanism itself for the silly things that some platforms list right the the idea here is to deal with questions to gather the consensus opinion of people who are pre 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.

Joe: That was excellent and first of all I think that's a great point obviously that you know the stock market contains both Microsoft and Nvidia and it also includes GameStop

Tracy: but this is also a recent development.

Joe: Yeah. Yeah.

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

Joe: Yeah that's true. But you know I paid for part of college trading penny stocks etc. So I know that and if you go back to you know penny stocks were the original prediction markets. go back to the Jesse Liverour era of true bucket shops and it was like pretty messy etc. So from your perspective right now if we're talking about prediction markets in the US you know it's really heavily sports betting then there's some election stuff and then there's some silly things etc. First of all let's zoom out for the big question. Do you think that eventually institutional investors will use prediction market like instruments to trade things like will there be a recession in the year 2026? It do you expect that these to become big volume contracts at some point?

Tomas Peterffy: Definitely. I'm absolutely convinced. So the stock market gives us a venue to to invest in the future basically in the future of of different companies. But you know some of the how those companies are actually going to end up fairing in the future has a lot to do with the economic environment and social environment in the future. And basically we are left to our own devices to decipher what the future holds. So the prediction markets gives an opportunity to gather experts around who are not afraid to put their money on the line and uh express what they think and to collect a consensus opinion so that we all know what we can possibly expect. if it's probably a better guess than what we individually could come up with.

Tracy: 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 illquid. 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?

Tomas Peterffy: Well, at this point like just it's very similar to any other market when it starts liquidity is always a big question and it takes a long time to gather sufficient liquidity. If you look at for example the options markets that have been around for 54 years I think initially there was very little liquidity and it was very difficult to trade more than say 20 or 30 contracts at a time. Nowadays you can trade thousands or maybe even millions of contracts. So it it has developed over the past five decades really well and uh the stock market is basically similar.

Joe: What unlocked the pro the liquidity was was there a market design choice like if you go back and you're thinking about okay the history of the options market etc. Was it just time and existence or were there certain either regulatory or market structure decisions that had to be made that truly unlocked the opportunity to take it to the next level volume-wise?

Tomas Peterffy: Yeah. Well, I think over time people have become more familiar with the idea of what an option is and it is a fairly complex idea relative to what the prediction markets are. That's why we try to come up with something simpler than options and as far as that is concerned I think we have done that. So it is not going to be as complex for people to understand a prediction contract as it is to understand an options contract. So I I think that it will not take equally long time to develop sufficient liquidity. So when I go on forecast trader right now, I see bets like, you know, will the United States economy enter a recession by the end of the second quarter of 2026 or will 2026 be the warmest year on record, which as we were talking about earlier, these are all things that I would say have economic implications when you compare what Interactive Brokers is doing versus say a Koshi or a poly market. Is that how you're trying to differentiate yourself with more, you know, quote serious, economically serious contracts? Is that your edge?

Tomas Peterffy: So, don't forget that we are very different companies. Interactive Brokers has a large following of serious successful institutional investors and serious investors who are managing relatively large portfolios on our platform. because she doesn't have that. So for us, prediction markets are an addendum that enables us to basically run out our offering and our customers are now have the ability to gauge such questions whether a recession what how likely a recession is going to be. Khi has no investors. basically other than investors in the prediction markets. So for them it's first of all it is hard to maintain yourself only on up until it 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 main stay and they are now very profitable due to sports. So if they didn't do sports maybe they couldn't even support the platform. I don't know. But just to be clear, do you get the impression that from the perspective of this broad institutional world that's going to come to prediction markets that one of your edges will be this focus that you're not in sports, that you're not in random pop culture, that this is going to be contracts that have the sort of quote serious investor in mind. Is that part of why you have an edge?

Tomas Peterffy: This is by choice. I we prefer to 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.

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

Tomas Peterffy: 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. uh 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 that enter schools today or decide to buy a house somewhere or decide what profession they are going to study and develop into. These sorts of questions deserve to have serious answers so that they can decide what to do.

Tracy: IBKR of of the brokerage platforms that a retailish person could access always been like one of the most sophisticated in terms of the wide range of instruments that are available from stocks to bonds to futures etc. Is this the first time that you have a sort of your own market that you built on the platform rather than IBKR simply being a window or a venue to trade on some other market? Is this new for you

Tomas Peterffy: in a big way? Yes. We 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.

Tracy: Sure.

Tomas Peterffy: And uh

Tracy: 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?

Tomas Peterffy: You're you're probably correct in that although we have had in the past started several indexes and and various futures contracts

Tracy: but indexes and futures contract different ones but they already existed.

Tomas Peterffy: Yeah. So the prediction market as such is yes it's you are correct. It's the first market where nothing have has existed like it

Joe: actually on that note you know I alluded to your history in the markets very long history and formative history but how come we didn't get prediction markets sooner you know like we could have been betting on global warming five or 10 years ago and it doesn't seem until I was reading about prediction market we started developing the prediction markets roughly 10 years ago

Tomas Peterffy: And uh 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. So what we did we we already had built the whole system. So what we did was we released it for phantom money. Huh.

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

Tomas Peterffy: Yeah. And but it it took hold enough for the people who funded Poly Market and Khi to see it and to play with it and then they had a better idea and they went forward with it. And you know Koshi went to Mazour 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 when you have a flourishing business it's very hard to do new things because the downside is so big for you. So he went ahead and then I wanted to buy Koshi but he wouldn't they wouldn't entertain a sale and they didn't even give me a price.

Tracy: Huh.

Tomas Peterffy: So

Tracy: what year was that? Then I sorry

Joe: what year was that that you were trying to buy it?

Tomas Peterffy: I think about five years ago.

Tracy: Oh wow.

Joe: That was going to be my next question. Why didn't you just buy Cali at that point?

Tomas Peterffy: Wait, are you going to Is it

Tomas Peterffy: So then I went to the CFTC and I asked for my our own license and they took three years to to work it through and give it to us. But we eventually got it last year. Actually, we got it in 24 just before the elections. Yeah.

Tracy: 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 uh change in administration.

Tomas Peterffy: 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 markets that is basically a loss leader and we are very sure that eventually it will be very profitable.

Joe: I'm just one other quick market structureish question. Are you going to provide leverage? How does that work for these instruments for

Tomas Peterffy: Well, we're working on that right now.

Tomas Peterffy: Up to now is been a very easy situation because 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.

Joe: Yeah.

Tomas Peterffy: 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'll be some firms that will go bust on leverage in prediction markets. Yes. H 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?

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

Joe: wait, why is it not as clear opinion? 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?

Tomas Peterffy: Well, no, you can go to the fed funds markets, not not the bond markets. You can go to the fat funds markets. That's that

Tracy: that is true. But that's another interesting thing. So fed funds markets existed for a long time and it only recently that people really consult the fed fund markets when they are wondering about rates and no longer talk to the economists

Joe: because just two years ago people kept talking about what which economist says what. Right.

Tracy: One day we're never going to have to consult economists again. I that's that's like that's like the trader's dream because

Tomas Peterffy: that's the world prediction markets are.

Tracy: 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 positions and good ones will make a lot of money and bad ones will lose. But can we be just among the three of us here and no one else is listen?

Joe: Just among the three of us here for a second. Like traders, you guys really don't like economists, do you? Like you hold you do not hold them in particularly high esteem, right? Like let's be hon it's just the three of us chatting here.

Tomas Peterffy: Well well for a trader and economist is very confusing because it depends on which one you talk to, right? [laughter] The prediction markets cure that deficiency, right?

Joe: Yeah. So, right now you could go to Robin Hood and you could trade markets on you could trade Kelshi markets via Robin Hood and we had the CEO of Robin Hood on Vlad Tenev and they also might build 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 uh IBKR account?

Tomas Peterffy: Absolutely. So we are coming out at the end of May with a consolidated feed

Tomas Peterffy: where contracts that exist on cellular platform we we we will have consolidated so that we 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 where that stock trades and we will do the same thing on uh prediction markets

Joe: 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 down to contract specifications and how Kelshi 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

Tracy: fungibility to yeah fungeibility to align across contract specifications and is there work being done on that?

Tomas Peterffy: So so fungeibility is a great issue and uh it is in the interest of the market participants

Tomas Peterffy: to to create as much funability as possible. So accordingly we are going to structure our contracts to be identical.

Tracy: Okay.

Tomas Peterffy: Whenever it's possible.

Tracy: 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 have been big trades on prediction markets ahead of some of those. Maybe someone knows something ahead of time and they're betting on it. 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?

Tomas Peterffy: So, insider trading has always been an issue.

Tomas Peterffy: I mean early on when I started my career I I lost half my initial capital based on insider trade.

Tracy: So I'm extremely familiar with with the damage it can cause. But on the other

Tomas Peterffy: 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

Tomas Peterffy: 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 first of all when you face with a 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 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.

Joe: Sir, just to be clear when you say this, you're talking about all markets here, not just predictions. You're okay. So even in the cyber the counter one counterargument I can think of a couple but one counterargument 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 etc that are just like have such an information edge that I could never win and so yes I

Tomas Peterffy: there are but you see there are sharks not right now. But if they if there if insider information just came out as soon as possible, there would be very little opportunity for the sharks to 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.

Tracy: 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 about

Tomas Peterffy: and protect them yourself. Don't rely on on national laws to to protect you. I mean protect them yourself.

Joe: Just stop talking to them.

Tracy: Yeah. Wait, I want to hear more about you mentioned that you lost a bunch of money half your capital.

Joe: Tell us that story

Tracy: from insider trading. What's that? Yeah. What's that about?

Tomas Peterffy: So, so when I I bought my seat on the American Stock Exchange as an options trader in 1977 and I had uh $200,000 of saved capital that I started my option trading business with on the floor of the American Stock Exchange. And maybe a a year or so later I was standing in Dupon. And in those days options were trading in 16s and eights. And it was a you know a day before expiration and uh there was a very cheap out of the money call that was to be expired the next day and somebody came in and in according to my fair value sheets that I only I had in those days because [snorts] I had my own options formula and I I generated the sheets for myself. That option was worth about $25, $26. And somebody came in and offered it at 38, 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?" H.

Tomas Peterffy: And nobody said anything. Everybody was stunned. And I said, "38." And he said, "Okay, how many?" And I said, "500." 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 500. So I was as a result 200 short. And then in the next several minutes, the stock halted trading and half an hour later it reopened with the news that Dupond had a fantastic quarter and they were splitting the stock 32 341

Tomas Peterffy: and it opened way way up. So the option I sold 200 of net for 38 opened at $4.5.

Tracy: I can see why you would be traumatized by insider trading. And yet I was really traumatized. I lost $90,000 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.

Joe: 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.

Tomas Peterffy: They were computer generated. I had a computer at home and I had developed my own option formula

Tomas Peterffy: in well much earlier in in 1970

Joe: and you were carrying them around on pieces of paper on the floor. Yeah, I had folded up in all my pockets.

Tracy: Well, 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's what feels different to you now? Is this just another technological improvement, another wave of, you know, productivity enhancing tech or is this something fundamentally new in your mind?

Tomas Peterffy: Well, it's a huge leap in technological developments. But 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 forron and cobalt 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 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 [clears throat] brokerage firms, we didn't think that we should do that. So then we went out of the market making business. But up to that point we were the largest market makers in [music] the world.

Joe: God, I have so many [laughter] 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 an 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're you would leave the computers running overnight and then you like come back in the morning and after

Tomas Peterffy: No, cuz that [laughter] tell tell us about like the technology that enabled you to determine fair market value of options back then.

Tomas Peterffy: So I had an Aliveti computer at home, a desktop Aliveti desktop computer at home. And when I started to think about options, I started to uh run a lot of 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 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 used that computer and if 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.

Tracy: Oh yeah.

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

Joe: I never saw this page before, but this makes a lot of sense to me. And I've 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 qu, 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 Chad GPT, you will not always get the same output. In fact, frequently you won't even with the exact same query of anything. When you're thinking about applications of AI within finance, etc. Does the non-deterministic element of AI models change

Tomas Peterffy: probabilistic language? Right? That's why it is not always the same. It's probabilistic. It's not deterministic, right?

Joe: Does that have implications for its use in finance?

Tomas Peterffy: 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 there's a probability for something to happen and nobody knows what really will happen. Right?

Tracy: Do you know how to code in cobalt?

Tomas Peterffy: In cobalt I can well in cobalt I cannot but I can code in fourth run or fourth or or basic or see number of languages. Yes.

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

Tomas Peterffy: Yeah.

Joe: Just going back sort of full circle to to the prediction markets. I basically, you know, you're probably right. One day they'll be big. What's the time frame? What 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?

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

Joe: I was just I was just going to say, Tracy, I've noticed one of the contracts that they have on IBKR is will UCLA's outofstate tuition exceed $53,000 in 2026. As someone who has children who like in the next decade are going to go to college, I like this could be a very useful thing for uh me to hedge at some point. Like my daughter heard that there's a good um theater school on UCLA already.

Tracy: Yeah, 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 program."

Joe: Kids these days are very focused,

Joe: but this could be a very useful instrument for me.

Tomas Peterffy: Absolutely. College tuitions. We were thinking about listing them at one point.

Tracy: Wait, 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. If I'm just betting on the actual outcome, what does it mean for actually funding economic activity?

Tomas Peterffy: So, so, 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 you your money will be employed.

Joe: 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?

Tomas Peterffy: No, I I think the big regulatory problem is that

Tomas Peterffy: 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

Joe: etc.

Tracy: 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

Tomas Peterffy: 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 any anything that has an impact on the stock price would be a on the financial statement would be a security. So there's a lot of stuff that has u an impact on the financial statement but nobody is listing it in any way. So it's this quagmire would have to be cleaned up and then we would have a much better market.

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

Tomas Peterffy: [laughter] That would be great.

Joe: All right, Tomas Pedfey, thank you so much for coming on OddLogs. Really appreciate it.

Tomas Peterffy: Thank you very much.

Joe: Joe, that was an interesting conversation.

Tracy: That was great. I was not expecting Tomas to be I don't you know I I maybe I should have but um it's interesting to hear him completely just say let's get rid of insider trading laws. 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 [laughter] transaction rather than the people that lost out. The other thing I thought was really interesting was the history with Koshi.

Joe: Yeah, I which I hadn't appreciated. I think this is going to be like such a 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,

Tracy: but we know from having talked to Vlad at Robin Hood, they're going to 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 going to acrew? Is it going to be like the venue where the trading is? Is it going to be who has the distribution? Because obviously Robin Hood and IBK are 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.

Joe: Totally. Well, the other thing that was interesting was the idea of creating standardized contracts or you know something more fungeible and then I wonder well if you do that do you have to create like an ISDA type body that's going to adjudicate on these things,

Tracy: right? Yeah. No, that's that's going to be like a huge question. My gut is that Tomas is right. Like if he is saying these are going to be a really big thing and he's like traders are going to want to 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 going to be big for like recession things and stuff like that? If Tomas thinks so, then I think so. That's that's where I stand.

Joe: It does feel like the steady march of progress is sort of in this direction, but progress progress. feels inevitable, but also I mean it's hard not to he mentioned GameStop and it's hard not to think back to just you know what 5 years ago now 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.

Tracy: 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 it's like everyone was like clutching their pearls and scandalized that the market, me included, it was like oh people are treating it like

Joe: you can call me a grandma. I know that's where you're going. It's fine.

Tracy: 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 sheets. The bucket shops or whatever they called were there for a very long time. there was the curve 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

Joe: is the theme of this conversation just give up basically

Tracy: 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 [snorts] there's been a I don't know what uh

Joe: what word are you going to use

Tracy: I don't know not seedy but all entertain I don't know like

Joe: embrace the seediness Yeah, something like that. Yeah.

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

Joe: Let's leave it there.

Tracy: All right. This has been another episode of the Odd Thoughts podcast. I'm Tracy Aloway. You can follow me at Tracy Aloway.

Joe: And I'm Joe Wisenthal. You can follow me at the stalwart. Follow our producers, Carmen Rodriguez at Kerman, Dashelob Bennett at Dashbot, and Kaleb Brooks at Kalebrooks. And for more OddLots content, go to bloomberg.com/odlots. 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/odlotss.

Tracy: And if you enjoy OddLots, 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 adree. All you need to do is find the Bloomberg channel on Apple Podcast and follow the instructions there. Thanks for listening.

Tracy: Hey there, OddLots listeners. Joe and I are very excited to announce that we will be hosting a live show in London on Thursday, May 7th.

Joe: 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 uh London one, and I'm really excited about it.

Tracy: Very exciting. So, if you want to hear some fantastic conversations being recorded live on stage, if you want to hang out with Joe and me, or if you want to hang out with other OddLots listeners, you should definitely save the date for your calendar, it's going to be at Wilton's Music Hall in East London again on Thursday, May 7th. Doors opening at 6:00 p.m.

Joe: And the key thing is, you know, every time we do a live show and they sell out, people complain like, "Oh, I didn't see the link. I wish I would have bought them sooner." We're going to be putting the link in the OddLots newsletter. So, go find the OddLots newsletter. Just search for it, subscribe to it, and the link will be there before it's anywhere else. So, uh this is your chance. Plus, if you like OddLots, 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.

Tracy: Hope to see you there.

Tracy: Hello and welcome to another episode of the OddLots podcast. I'm Tracy Aloway

Joe: and I'm Joe Weisenthal.

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

Joe: Yeah. 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.

Tracy: Yes.

Joe: Why prediction market 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 [laughter] 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.

Tracy: Yeah. No, I think there's a great point. I mean, I think you're being generous actually with the Avengers thing. I mean, maybe

Joe: 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 Kelshi, 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 the so the potential there in my mind for some of these things is obviously quite high. Well, you could say certainly in our current economic environment, being able to bet on things like is the US going to strike Car Island or something like that could be actually useful if you are a large institutional investor versus just betting on the price of oil or the direction of stocks or something like that. However, I have a hard time thinking that institutional investors are going to flock to a platform that contains questions that are both is there going to be a recession and also some completely out there pop culture kind of contract.

Tracy: Totally. Or you know obviously beyond the pop culture they're dominated by sports betting and so forth. So that's another question. Also, you know, the marketing tactics used by the major prediction market companies are very different than anything, pretty different than anything we see in traditional futures, etc. So, I think we both Yeah, like I do on a fully think that like there could be legitimate use cases where there are natural hedgers, natural liquidity providers for some of these like swaps, some of these pure binary instruments, etc. But there are some pretty big chicken and egg problems and other things to like actually get there where there's volume. You know, for example, some of the weather related ones. Absolutely. They're great. No one's 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.

Joe: 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 Pedy. 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 Thoughts.

Tomas Peterffy: Thank you very much for having me.

Tracy: 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 Cali or Poly Market versus someone with a lot of money who might be interested in trading in size.

Tomas Peterffy: 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 and less important questions. So it all depends on what you ask. So the stock market has Microsoft and Nvidia and also has you know the GameStop and other silly stocks right so it is a parallel situation so you cannot blame prediction market the mechanism itself for the silly things that some platforms list right the the idea here is to deal with questions to gather the consensus opinion of people who are pre 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.

Joe: That was excellent and first of all I think that's a great point obviously that you know the stock market contains both Microsoft and Nvidia and it also includes GameStop

Tracy: but this is also a recent development.

Joe: Yeah. Yeah.

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

Joe: Yeah that's true. But you know I paid for part of college trading penny stocks etc. So I know that and if you go back to you know penny stocks were the original prediction markets. go back to the Jesse Liverour era of true bucket shops and it was like pretty messy etc. So from your perspective right now if we're talking about prediction markets in the US you know it's really heavily sports betting then there's some election stuff and then there's some silly things etc. First of all let's zoom out for the big question. Do you think that eventually institutional investors will use prediction market like instruments to trade things like will there be a recession in the year 2026? It do you expect that these to become big volume contracts at some point?

Tomas Peterffy: Definitely. I'm absolutely convinced. So the stock market gives us a venue to to invest in the future basically in the future of of different companies. But you know some of the how those companies are actually going to end up fairing in the future has a lot to do with the economic environment and social environment in the future. And basically we are left to our own devices to decipher what the future holds. So the prediction markets gives an opportunity to gather experts around who are not afraid to put their money on the line and uh express what they think and to collect a consensus opinion so that we all know what we can possibly expect. if it's probably a better guess than what we individually could come up with.

Tracy: 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 illquid. 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?

Tomas Peterffy: Well, at this point like just it's very similar to any other market when it starts liquidity is always a big question and it takes a long time to gather sufficient liquidity. If you look at for example the options markets that have been around for 54 years I think initially there was very little liquidity and it was very difficult to trade more than say 20 or 30 contracts at a time. Nowadays you can trade thousands or maybe even millions of contracts. So it it has developed over the past five decades really well and uh the stock market is basically similar.

Joe: What unlocked the pro the liquidity was was there a market design choice like if you go back and you're thinking about okay the history of the options market etc. Was it just time and existence or were there certain either regulatory or market structure decisions that had to be made that truly unlocked the opportunity to take it to the next level volume-wise?

Tomas Peterffy: Yeah. Well, I think over time people have become more familiar with the idea of what an option is and it is a fairly complex idea relative to what the prediction markets are. That's why we try to come up with something simpler than options and as far as that is concerned I think we have done that. So it is not going to be as complex for people to understand a prediction contract as it is to understand an options contract. So I I think that it will not take equally long time to develop sufficient liquidity. So when I go on forecast trader right now, I see bets like, you know, will the United States economy enter a recession by the end of the second quarter of 2026 or will 2026 be the warmest year on record, which as we were talking about earlier, these are all things that I would say have economic implications when you compare what Interactive Brokers is doing versus say a Koshi or a poly market. Is that how you're trying to differentiate yourself with more, you know, quote serious, economically serious contracts? Is that your edge?

Tomas Peterffy: So, don't forget that we are very different companies. Interactive Brokers has a large following of serious successful institutional investors and serious investors who are managing relatively large portfolios on our platform. because she doesn't have that. So for us, prediction markets are an addendum that enables us to basically run out our offering and our customers are now have the ability to gauge such questions whether a recession what how likely a recession is going to be. Khi has no investors. basically other than investors in the prediction markets. So for them it's first of all it is hard to maintain yourself only on up until it 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 main stay and they are now very profitable due to sports. So if they didn't do sports maybe they couldn't even support the platform. I don't know. But just to be clear, do you get the impression that from the perspective of this broad institutional world that's going to come to prediction markets that one of your edges will be this focus that you're not in sports, that you're not in random pop culture, that this is going to be contracts that have the sort of quote serious investor in mind. Is that part of why you have an edge?

Tomas Peterffy: This is by choice. I we prefer to 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.

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

Tomas Peterffy: 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. uh 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 that enter schools today or decide to buy a house somewhere or decide what profession they are going to study and develop into. These sorts of questions deserve to have serious answers so that they can decide what to do.

Tracy: IBKR of of the brokerage platforms that a retailish person could access always been like one of the most sophisticated in terms of the wide range of instruments that are available from stocks to bonds to futures etc. Is this the first time that you have a sort of your own market that you built on the platform rather than IBKR simply being a window or a venue to trade on some other market? Is this new for you

Tomas Peterffy: in a big way? Yes. We 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.

Tracy: Sure.

Tomas Peterffy: And uh

Tracy: 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?

Tomas Peterffy: You're you're probably correct in that although we have had in the past started several indexes and and various futures contracts

Tracy: but indexes and futures contract different ones but they already existed.

Tomas Peterffy: Yeah. So the prediction market as such is yes it's you are correct. It's the first market where nothing have has existed like it

Joe: actually on that note you know I alluded to your history in the markets very long history and formative history but how come we didn't get prediction markets sooner you know like we could have been betting on global warming five or 10 years ago and it doesn't seem until I was reading about prediction market we started developing the prediction markets roughly 10 years ago

Tomas Peterffy: And uh 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. So what we did we we already had built the whole system. So what we did was we released it for phantom money. Huh.

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

Tomas Peterffy: Yeah. And but it it took hold enough for the people who funded Poly Market and Khi to see it and to play with it and then they had a better idea and they went forward with it. And you know Koshi went to Mazour 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 when you have a flourishing business it's very hard to do new things because the downside is so big for you. So he went ahead and then I wanted to buy Koshi but he wouldn't they wouldn't entertain a sale and they didn't even give me a price.

Tracy: Huh.

Tomas Peterffy: So

Tracy: what year was that? Then I sorry

Joe: what year was that that you were trying to buy it?

Tomas Peterffy: I think about five years ago.

Tracy: Oh wow.

Joe: That was going to be my next question. Why didn't you just buy Cali at that point?

Tomas Peterffy: Wait, are you going to Is it

Tomas Peterffy: So then I went to the CFTC and I asked for my our own license and they took three years to to work it through and give it to us. But we eventually got it last year. Actually, we got it in 24 just before the elections. Yeah.

Tracy: 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 uh change in administration.

Tomas Peterffy: 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 markets that is basically a loss leader and we are very sure that eventually it will be very profitable.

Joe: I'm just one other quick market structureish question. Are you going to provide leverage? How does that work for these instruments for

Tomas Peterffy: Well, we're working on that right now.

Tomas Peterffy: Up to now is been a very easy situation because 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.

Joe: Yeah.

Tomas Peterffy: 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'll be some firms that will go bust on leverage in prediction markets. Yes. H 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?

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

Joe: wait, why is it not as clear opinion? 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?

Tomas Peterffy: Well, no, you can go to the fed funds markets, not not the bond markets. You can go to the fat funds markets. That's that

Tracy: that is true. But that's another interesting thing. So fed funds markets existed for a long time and it only recently that people really consult the fed fund markets when they are wondering about rates and no longer talk to the economists

Joe: because just two years ago people kept talking about what which economist says what. Right.

Tracy: One day we're never going to have to consult economists again. I that's that's like that's like the trader's dream because

Tomas Peterffy: that's the world prediction markets are.

Tracy: 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 positions and good ones will make a lot of money and bad ones will lose. But can we be just among the three of us here and no one else is listen?

Joe: Just among the three of us here for a second. Like traders, you guys really don't like economists, do you? Like you hold you do not hold them in particularly high esteem, right? Like let's be hon it's just the three of us chatting here.

Tomas Peterffy: Well well for a trader and economist is very confusing because it depends on which one you talk to, right? [laughter] The prediction markets cure that deficiency, right?

Joe: Yeah. So, right now you could go to Robin Hood and you could trade markets on you could trade Kelshi markets via Robin Hood and we had the CEO of Robin Hood on Vlad Tenev and they also might build 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 uh IBKR account?

Tomas Peterffy: Absolutely. So we are coming out at the end of May with a consolidated feed

Tomas Peterffy: where contracts that exist on cellular platform we we we will have consolidated so that we 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 where that stock trades and we will do the same thing on uh prediction markets

Joe: 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 down to contract specifications and how Kelshi 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

Tracy: fungibility to yeah fungeibility to align across contract specifications and is there work being done on that?

Tomas Peterffy: to to create as much funability as possible. So accordingly we are going to structure our contracts to be identical.

Tomas Peterffy: to to create as much funability as possible. So accordingly we are going to structure our contracts to be identical.

Tracy: Okay.

Tomas Peterffy: Whenever it's possible.

Tracy: 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 have been big trades on prediction markets ahead of some of those. Maybe someone knows something ahead of time and they're betting on it. 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?

Tomas Peterffy: So, insider trading has always been an issue.

Tomas Peterffy: I mean early on when I started my career I I lost half my initial capital based on insider trade.

Tracy: So I'm extremely familiar with with the damage it can cause. But on the other

Tomas Peterffy: 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

Tomas Peterffy: 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 first of all when you face with a 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 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.

Joe: Sir, just to be clear when you say this, you're talking about all markets here, not just predictions. You're okay. So even in the cyber the counter one counterargument I can think of a couple but one counterargument 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 etc that are just like have such an information edge that I could never win and so yes I

Tomas Peterffy: there are but you see there are sharks not right now. But if they if there if insider information just came out as soon as possible, there would be very little opportunity for the sharks to 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.

Tracy: 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 about

Tomas Peterffy: and protect them yourself. Don't rely on on national laws to to protect you. I mean protect them yourself.

Joe: Just stop talking to them.

Tracy: Yeah. Wait, I want to hear more about you mentioned that you lost a bunch of money half your capital.

Joe: Tell us that story

Tracy: from insider trading. What's that? Yeah. What's that about?

Tomas Peterffy: So, so when I I bought my seat on the American Stock Exchange as an options trader in 1977 and I had uh $200,000 of saved capital that I started my option trading business with on the floor of the American Stock Exchange. And maybe a a year or so later I was standing in Dupon. And in those days options were trading in 16s and eights. And it was a you know a day before expiration and uh there was a very cheap out of the money call that was to be expired the next day and somebody came in and in according to my fair value sheets that I only I had in those days because [snorts] I had my own options formula and I I generated the sheets for myself. That option was worth about $25, $26. And somebody came in and offered it at 38, 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?" H.

Tomas Peterffy: And nobody said anything. Everybody was stunned. And I said, "38." And he said, "Okay, how many?" And I said, "500." 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 500. So I was as a result 200 short. And then in the next several minutes, the stock halted trading and half an hour later it reopened with the news that Dupond had a fantastic quarter and they were splitting the stock 32 341

Tomas Peterffy: and it opened way way up. So the option I sold 200 of net for 38 opened at $4.5.

Tracy: I can see why you would be traumatized by insider trading. And yet I was really traumatized. I lost $90,000 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.

Joe: 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.

Tomas Peterffy: They were computer generated. I had a computer at home and I had developed my own option formula

Tomas Peterffy: in well much earlier in in 1970

Joe: and you were carrying them around on pieces of paper on the floor. Yeah, I had folded up in all my pockets.

Tracy: Well, 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's what feels different to you now? Is this just another technological improvement, another wave of, you know, productivity enhancing tech or is this something fundamentally new in your mind?

Tomas Peterffy: Well, it's a huge leap in technological developments. But 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 forron and cobalt 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 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 [clears throat] brokerage firms, we didn't think that we should do that. So then we went out of the market making business. But up to that point we were the largest market makers in [music] the world.

Joe: God, I have so many [laughter] 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 an 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're you would leave the computers running overnight and then you like come back in the morning and after

Tomas Peterffy: No, cuz that [laughter] tell tell us about like the technology that enabled you to determine fair market value of options back then.

Tomas Peterffy: So I had an Aliveti computer at home, a desktop Aliveti desktop computer at home. And when I started to think about options, I started to uh run a lot of 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 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 used that computer and if 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.

Tracy: Oh yeah.

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

Joe: I never saw this page before, but this makes a lot of sense to me. And I've 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 qu, 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 Chad GPT, you will not always get the same output. In fact, frequently you won't even with the exact same query of anything. When you're thinking about applications of AI within finance, etc. Does the non-deterministic element of AI models change

Tomas Peterffy: probabilistic language? Right? That's why it is not always the same. It's probabilistic. It's not deterministic, right?

Joe: Does that have implications for its use in finance?

Tomas Peterffy: 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 there's a probability for something to happen and nobody knows what really will happen. Right?

Tracy: Do you know how to code in cobalt?

Tomas Peterffy: In cobalt I can well in cobalt I cannot but I can code in fourth run or fourth or or basic or see number of languages. Yes.

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

Tomas Peterffy: Yeah.

Joe: Just going back sort of full circle to to the prediction markets. I basically, you know, you're probably right. One day they'll be big. What's the time frame? What 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?

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

Joe: I was just I was just going to say, Tracy, I've noticed one of the contracts that they have on IBKR is will UCLA's outofstate tuition exceed $53,000 in 2026. As someone who has children who like in the next decade are going to go to college, I like this could be a very useful thing for uh me to hedge at some point. Like my daughter heard that there's a good um theater school on UCLA already.

Tracy: Yeah, 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 program."

Joe: Kids these days are very focused,

Joe: but this could be a very useful instrument for me.

Tomas Peterffy: Absolutely. College tuitions. We were thinking about listing them at one point.

Tracy: Wait, 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. If I'm just betting on the actual outcome, what does it mean for actually funding economic activity?

Tomas Peterffy: So, so, 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 you your money will be employed.

Joe: 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?

Tomas Peterffy: No, I I think the big regulatory problem is that

Tomas Peterffy: 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

Joe: etc.

Tracy: 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

Tomas Peterffy: 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 any anything that has an impact on the stock price would be a on the financial statement would be a security. So there's a lot of stuff that has u an impact on the financial statement but nobody is listing it in any way. So it's this quagmire would have to be cleaned up and then we would have a much better market.

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

Tomas Peterffy: [laughter] That would be great.

Joe: All right, Tomas Pedfey, thank you so much for coming on OddLogs. Really appreciate it.

Tomas Peterffy: Thank you very much.

Joe: Joe, that was an interesting conversation.

Tracy: That was great. I was not expecting Tomas to be I don't you know I I maybe I should have but um it's interesting to hear him completely just say let's get rid of insider trading laws. 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 [laughter] transaction rather than the people that lost out. The other thing I thought was really interesting was the history with Koshi.

Joe: Yeah, I which I hadn't appreciated. I think this is going to be like such a 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,

Tracy: but we know from having talked to Vlad at Robin Hood, they're going to 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 going to acrew? Is it going to be like the venue where the trading is? Is it going to be who has the distribution? Because obviously Robin Hood and IBK are 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.

Joe: Totally. Well, the other thing that was interesting was the idea of creating standardized contracts or or you know something more fungeible and then I wonder well if you do that do you have to create like an ISDA type body that's going to adjudicate on these things,

Tracy: right? Yeah. No, that's that's going to be like a huge question. My gut is that Tomas is right. Like if he is saying these are going to be a really big thing and he's like traders are going to want to 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 going to be big for like recession things and stuff like that? If Tomas thinks so, then I think so. That's that's where I stand.

Joe: It does feel like the steady march of progress is sort of in this direction, but progress progress. feels inevitable, but also I mean it's hard not to he mentioned GameStop and it's hard not to think back to just you know what 5 years ago now 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.

Tracy: 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 it's like everyone was like clutching their pearls and scandalized that the market, me included, it was like oh people are treating it like

Joe: you can call me a grandma. I know that's where you're going. It's fine.

Tracy: 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 sheets. The bucket shops or whatever they called were there for a very long time. there was the curve 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

Joe: is the theme of this conversation just give up basically

Tracy: 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 [snorts] there's been a I don't know what uh

Joe: what word are you going to use

Tracy: I don't know not seedy but all entertain I don't know like

Joe: embrace the seediness Yeah, something like that. Yeah.

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

Joe: Let's leave it there.

Tracy: All right. This has been another episode of the Odd Thoughts podcast. I'm Tracy Aloway. You can follow me at Tracy Aloway.

Joe: And I'm Joe Wisenthal. You can follow me at the stalwart. Follow our producers, Carmen Rodriguez at Kerman, Dashelob Bennett at Dashbot, and Kaleb Brooks at Kalebrooks. And for more OddLots content, go to bloomberg.com/odlots. 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/odlotss.

Tracy: And if you enjoy OddLots, 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 adree. All you need to do is find the Bloomberg channel on Apple Podcast and follow the instructions there. Thanks for listening.