Creating prediction markets (and suing the CFTC) with Tarek Mansour and Luana Lopes Lara

25:38So maybe finishing that sort of line of thought and then I'll get to the answer there. You now have a model where you need liquidity to be built on the fly, much faster, much more dynamically. And the market makers, the traditional Wall Street market makers are not geared up for that. It's not like they can spin up a new desk to price like politics or price culture in an hour. right and so but this is the part that gets really interesting which is like and this goes back to the foundational principles around prediction markets is like a lot of these markets the people that will price them the best may not actually be the experts or the authority figures that you usually would think about it's actually random people like you know that live right internet anons yeah exactly the super forecasters those are it's like extremely dispersed you cannot find like a clearly defined the demographic or who they are and and i think that the thing where we got to now and that took a very long time and you had to incentivize is we have the community right a strong community of super forecasters that are on calcium that can help price these things extremely effectively and fast where you know you don't have but but it took a while to kind of get them incentivized and come in and and spend the time and resources to take it from a hobby which is it was a hobby to a part-time job now it now it's a full-time job because the pie is so big.

26:59And a metric that we can share is actually the, when you think about traditional market makers, the biggest percentage on a platform of a traditional market maker is less than 5 % of the maker orders in that market that have matched. Of the liquidity. Of the liquidity. Sorry, say that again? Yeah, so less than 5 % of the order, so people come and make orders, less than 5 % of the ones that match actually come from the big institutional market makers you'd think about. I see. Over 95 are just like peer-to-peer. Peer-to-peer, like, or funds to have like two people that just got stuck. Which is unusual for you.

27:30How many of those small full-time little shops are there? There's over 2 ,000 people that are market-making. People slash small shops, yeah. Yeah, on like a specific... I think what Matt's getting at is like, who is a market-maker on Cal Street? Like, you know, there's all these Jane Street conspiracy theory memes. Is it like Jane Street? That's my Twitter feed. Or is it like some guy in his garage, you know, drinking Red Bull at 3 a.m. Right. Market-making. The guys in the garage are the most commercial. And you're saying those are 95%. of the flow. They're extremely crucial to the ecosystem because they price fast.

28:03They're monitoring the situation all the time, right? They're the original situation monitors. Yeah, yeah, I see. CalShree is built on people who are monitoring the situation. And so, one example I'll give, and I've given this in the past, the best inflation forecaster on CalShree over the last few years is none of the institutions or the big name hedge funds. It's this guy who lives in Kansas, never traded financial markets before, just likes to read the news and just knows how to predict inflation. He can feel it. And you have so many of these people. I would say a few thousand that are formally committed, but there's tens of thousands of these people that know a bunch of different topics.

28:52And they're actively pricing these things. And they do it as a full-time job and they get rewarded for that. You need to talk about my favorite user. Oh, yeah. Well, I have a new favorite user, by the way. Okay, each of you can tell it's your favorite user. I was thinking about this this morning. Who's your new favorite user? The Wall Street Journal article about the tax guy. Oh, yeah, that's true. He's a good candidate. But no, my favorite user is this Rihanna Grande super fan. And he found Kyle during the election season. He's like, I don't like the elections. Like, whatever. Then he found our Billboard ranking markets of, like, charts.

29:23He's going to work on important markets. Important markets. to me very important and he's made over 150 000 he's getting every single thing he paid back student loans he put himself for a master's degree bought a car and all those things and he just like loves these markets and he's never really traded never done anything like that before but it's the first time that he actually has a way to monetize this very compulsive hobby that he had on you know music charts uh and he's able to do it and he's also very very nice to us on twitter so So I had many over the years, but maybe I shift a lot. He's not loyal.

29:59See, I'm loyal to my guy. Well, I love all of our users. But there was an article last week in the Wall Street Journal about a tax accountant who was very active on Kalshi, Alan. and he, you know, when Doge came around and like there were a lot of sort of talk about how much they could cut, he actually read a bunch of tax codes and a bunch of statutes, just like dug extremely deep and then realized there is no way they could hit the targets. Like, and even if, like, he really kind of deterministically realized and then he basically talked to his wife and he's like, I have extremely high conviction in this trade.

30:48I know I, you know, and you know, it's a bit like Michael Berry with the big short. So this guy put a big short but on Doge this time, right? And it was big. Like he really kind of went all in and, you know, he won. And it's just like one of those like amazing sort of showcases of what this can do. Like now you have a market that like if you have that sort of knowledge, which maybe oftentimes is esoteric, like I'm assuming none of us have read all these tax codes, you can actually go out in the world, do research, get smarter about the world, and then, you know, get rewarded for that. And that's awesome, right?

31:21You know, an early field of AI was poker bots. Are you seeing any good AI market makers? When you say no one's read all these tax codes, I mean, no one except Claude. That's fair. That's fair. We should ask. We are seeing more, like, increasingly more people using agents to trade. So that's definitely... Especially on the API side. On the API side, it's very big. Do you have users who are successfully running market-making businesses that are mostly agentic? Users don't exactly tell us their strategies. But you talk to them. Generally, yes, yes, yes. But the way I think about it is, do we think Rentech back in the days was using agentic models?

32:03I'm talking about Renaissance to trade. Yeah, the early versions of them. And so I think they're just evolving and they're getting better. And like most of our traders in their stack have some sort of like summary and synthesis module that's AI driven. Yeah, I guess what I'm curious about is fully autonomous, no human in the loop, consuming information and providing a market based on that. Like that feels like it's coming quite soon if it's not like your cloth making a market. Yeah, I don't know if there's a full. I know that for example there's a lot for international elections just on like for example translating all documents polls and being able to kind of do all of that but I don't know if it's all we're doing so we don't know if the models are there yet right that's and I was so you know we launched Calci Research recently which and one of the threads that we want to work on is we're talking to some of the research labs to create a new benchmark around which models actually predict the future better which could be a unique benchmark around like are these models developing some understanding of the world that goes beyond memorizing, you know, old patterns.

33:12And I'm honestly excited to see how it goes. And what's the eval for that? We don't know yet. But I think you could roughly kind of let the models run for, you know, make predictions on same set of markets for like a month or two and see which ones performed that like, you know, percentage of predictions that were correct, P &L over time, et cetera. Yes. Okay, another market making question. So sports bookies have this need to crack down on what in their industry is called sharps. You know, people who are too good. Where, like, I think people don't think so much about this dynamic, but for a sports bookie, the best possible punter is someone who is kind of unsophisticated, bets on like their home soccer team's game.

33:59Inrespected with the odds. Exactly, and just wants the home team to win or whatever. And the worst kind is someone who's like super sophisticated, finding the narrow markets, because for a bookie, you know, maybe they're making odds on 10 ,000 different markets. Like they only need to be wrong once or twice for, you know, people get to choose which they play on. And so they presumably can't be right on all the odds that they're offering. And these sophisticated people go find those. And so what happens is they basically use behavioral signals to identify if you are just signed up and you're betting on your home sports team's game, that's good.

34:37And if you appear to be really sophisticated with all the signals that they would use, exactly, they shut them down. But it's interesting, right? You think like I'm just booking on the bets that, you know, on the odds that you're offering. But like if you're too good, they'll shut you down. It's maybe like car counting in Vegas. Do you have this dynamic with sharps? Like I would have thought no, that you just are fine with it. But, like, do the market makers worry about two sophisticated counterparties on the other side? The Sharps are the market makers. I mean, they're super forecasters. To be clear, we don't limit any winners.

35:07We don't have any of the, like, we want all the winners. Okay, the specific dynamics. Well, we need the Sharps because how do you get market accuracy without the Sharps? This is the difference of, like, the... Well, yes and no, right? Because what you want is different. Because the Sharps can snipe. They can just turn up once when the odds are wrong, grab a big win, and then disappear. Whereas what you're describing is you want, during the game or during the election, you want narrow spreads all the time. And so I feel like providing good market making is different than being right. But a lot of the sharps can actually do better if they provide market making and, you know, like become part of the liquidity.

35:45So this is the big difference, which is very important. Like, that the, the, it may be a disclaimer. Like, I don't gamble. I trade. which I've always found a difference. And I think gambling is this idea where the business model is you are the house and your revenue is your customer's losses. So a lot of the dynamic that you describe has to be true because your incentive is like, well, somebody's making money, I got to stop them because they're making me lose. That's just going straight from my bottom line. And the opposite is true. If somebody's losing money, I got to figure out how to bring them back.

36:18That's a very different model from like traditional financial markets where like the structure is you have to incentivize fairness and transparency. That's the structure. Like you want to create fair rules of the game for people to participate. Maybe Matt is better than Luana and maybe Luana is better than Matt and like they can battle it out. They can figure it out. You think the incentive system is very different where you do not like a casino or something. You do not monetize on some zero, some other person losing. You monetize just on transaction fees. Yeah, the best outcome for us is people are like, this is fair.

36:47They have good prices. They have stable liquidity. I'm going to go there. But of course, for us to get there, we also need to incentivize different players differently. So that's why, for example, a lot of the liquidity programs come into effect. They're like, okay, if we're providing liquidity, you're taking a lot more risks because you're putting yourself out to be sniped, then we're going to lower your fees. But if you're taking and you're going to snipe, you're going to have higher fees so you can pay for that activity. So in a lot of ways... You'll use fees to incentivize pro-social behavior?

37:10Exactly. And I think that that's actually how we see a lot of, how financial markets actually do the same thing. Financial markets are the same. The same thing. It's more balancing out the marketplace so that people that are providing value to the marketplace have some, you know, a little bit more tilt. And then people that are like taking away value have a little bit less. What behavior is pro-social and what behavior is anti-social? Well, insider trading is anti-social. Right, that's a big one. Yeah, yeah. And illegal. Yeah. But, you know, but it's, and look, sniping is part of it, right? You need people that like, all of a sudden have gained some information edge and they do it in traditional financial markets all the time, right?

37:47Like that, and, And but to have liquidity and make sure that people are there and they're investing the resources, they have to get, you know, as you said, some incentives. But the interesting point, I think, and I think this is part of why prediction markets are being adopted so much is people like this idea that if like your edge is proportional to your research, how informed you are, how much time and energy you put into this. and I think that only exists in prediction markets or traditional financial markets, except that for a lot of people, traditional financial markets, they're just less interesting, right?

38:21Like in here, you're researching about Doge and what's going to happen or what the election and how people think about elections and how they vote. That, at least to me, feels a little bit more interesting than like anything about IBM's quarterly earnings every quarter.

38:37Calci has built a new kind of marketplace where real-world outcomes are traded, like whether the US will confirm whether aliens exist before 2027. You have thousands of participants opening, transferring, settling their positions, all in real time. And underneath it, as you can imagine, there's a complex multi-party flow of funds. That choreography on Calci is powered by Stripe Connect, onboarding participants, processing payments, routing funds, managing payouts. When money movement becomes programmable, new products or even new market structures become possible. So if you're building something new with complex money flows, Stripe Connect was built for you.

39:15Let's talk like different market verticals. And I think today everyone gets elections, they get sports, they get economic indicators. But I think you can look at prediction markets as this kind of search function across the set of interesting markets humanity wants to trade. And it's kind of a weird artifact that like the CME used to green light like wheat and oil and corn. But now you get to green light 1 ,000 markets a day. So what do you think we're going to find as we do that? One thing that we're very excited for, we're actually starting to go in the direction of, for example, things like watches and bags and all of those things that are more going to the collectible side.

39:58They're actually able to do derivatives on those things. One thing that you should talk about is the GPU. I feel like compute could be a huge market. And I think the compute, what we're thinking a lot about is that there's a lot of these types of things that they function better as a more traditional future. So things that don't have a binary, will it be at this price? Yes, no, but it's more like an actual future. You can have margin. You can have more like institutional grade liquidity and all of that. And I think that that's a great example of when we start going more outside of binary markets and more into the traditional ones, then what we're doing is expanding kind of that from grain to compute.

40:36So it strikes me that obviously the futures markets that have worked best are these large commodity categories. Because we're sort of in an era where humanity is spending more money than it's ever spent before on a new commodity category. And the other traditional markets don't seem to be attacking compute. So the way that we think about, we want to be the biggest derivatives exchange in the world, right? And for that, when we think about product roadmap, there's four things that matter. The first one is breadth of topics of markets, right? So we think about compute, we think about sports, we think about elections, We think about securities.

41:10We think about all of that. The second bucket is really market structure. So right now, we only have the binary yes-no. We want to have things like futures, like swaps, options, all of that. The third one is really margining systems. Right now, it's very bad. You have to put all the money up front. You have to tie up all the capital. Right, which makes a lot of, for example, will a hurricane happen this year? Very, very bad for you to be actually market-making or selling those contracts. It doesn't make almost any sense capital-wise. And then the last one is liquidity. And what we think about is if we win these, we have the broadest set of markets, we have the broadest set of market structures, we have great and very, I don't want to say cheap margin, but in a way around that and then good liquidity, we're going to win on everything that we do.

41:52So everything that we do in the company is like, it needs to be in one of these four buckets. And I think a lot of the topic side is like, how do we actually match the right topic with the right market structure, the right margining, and how do we make sure that it's all coming together? But you're completely right. I think that being able to build all the margining systems, all those things from scratch, we're going to be able to do margin models a lot faster and list a lot of these kind of new markets a lot faster. Because of your direct mobile app interface and the fact that you target a lot of retail, do you worry that sort of the markets you're going to gravitate towards are the ones that are most interesting to just retail?

42:32And how much do you think about... As opposed to like the pro markets? The kind of institutional markets. I think of compute as much more of an institution-to-institution market. So yeah, how do you think about building liquidity and interest upmarket? Yeah. We almost divide the company again in a way. We divide the markets in sports, crypto, and everything else. But how do we make what we have great but very new things? Because I think what got Kaoshi here was not the regulatory side. It was really that we were just really pushing what is the next thing. It was elections and then after elections, sports.

43:04And for us, it's like we need to be pushing what the next thing is and doing that very well. And I think that if we stop doing that, we're not going to win. The company's kind of structured that we have the market operations. We have the engineering side, all of that, that's set up for maintenance and improvement of what we have. And then the new teams like institutional, the margin team, international that are kind of pushing forward. And we just try to kind of find a balance on like those teams and then a platform layer that is like the core exchange and compliance and all of that. But it is tricky because we're still like 120 people to do it.

43:37Are you seeing pull already on the institutional side in certain topics? Yeah, no, for sure. And I think that we actually just launched a week ago this thing called BlockTrades. I don't know if you know BlockTrades. It's a very institutional way to do it that I can call you and negotiate a trade, and then we go and put it in the exchange versus trying to do everything that way. So we're trying to build a lot of features to start getting more in the institutional side. So are they trading the same things that are on the Calci retail, or are you offering new types of products for them? Yes and no.

44:06So whenever they're interested in something like the—there was a lot of interest on the tariff situation. Is there going to be a tariff or not? A lot now with the petroleum, like the reserve, and kind of how that's going to go. So whenever we hear we want to trade this market, we just list it directly, and then it's accessible to everyone. But I do think there's going to be a very big gap on what the institutions are going to end up trading versus not. But we just list it to everyone. It's very cheap for us at this point to lease new markets. In the early days of Uber, it wasn't bad for the taxi business because it was just excess capacity and, you know, it was serving unmet need.

44:40But then after a while, it was bad for the taxi business. Are there existing businesses that will feel the effects of Calci and other prediction markets because it's a bigger market, there's more liquidity? Like I can think about just existing futures exchanges, like maybe Calci is a better place to hedge your soybean prices or what have you. There's sports bookies, obviously. There's political polling firms where maybe you can get kind of the same information way cheaper. So who do you think will start feeling the effects of prediction markets because they have been in some way superseded? Yeah, there's that funny meme of like the guy knocking on the door and it's like, who's the next one?

45:20The Grim Reaper meme, yeah, yeah. So you don't want to do that. But I think that a lot of volumation, right? I think that just traditional betting that we talked about, all the issues that that industry has that we're very different from. There is a traditional futures now are going way more into their space. So I think there's going to be a difference there. There is a political polling that I think since the last election, there's just a lot of campaigns are using our data and all that. There's parametric insurance. Once we have margin, we can start going to more hurricane, natural disaster insurance, all of that side.

45:51Is there a tragedy of the commons with the polling? Like part of the reason the prediction markets are accurate is because they interpret the polls. Right. So like if people stop using polls, like in some sense, polls are the sensor that you get of what people's opinions are. And then the prediction markets are like the mathematical interpretation of the polls. Yeah. My take is that polls are just going to get a lot better. Because what people are going to be is like, OK, I can make money if my polls are right. So I'm just going to commission this poll and I'm going to do this. and now you can actually like compete a lot of polling models into one market.

46:26It's like FiveThirtyEight did kind of the meta poll interpretation. Exactly. And you can kind of have one number that's kind of aggregating all of that. And even in the last election, there was someone that actually did this. They commissioned a specific poll to do like nearest neighbors type of thing. It was like, I don't know how it was, but a different type of poll. And then they were able to make a lot more money in the markets. And that's the whole point of like having money and skin in the game aligns the incentives with truth and then the polls are not just paid for like, tell me what I want to hear, but the real number.

46:56So I think it's complimentary. Same with the news. A lot of people are like prediction markets will destroy the news. I think it's way more complimentary. It's like when you're talking about an election, you're going to give your opinion. The market's not going to give you an opinion. You still need the commentators, but they're going to be able to show a number and be like, this is what the forecast is and this is my opinion on it. I don't think the opinions are going to disappear. You guys referenced insider trading earlier, and there's just the policy question as to what the right policy should be around insider trading when it comes to prediction markets.

47:28I think it's pretty nuanced. Like it's nuanced in the stocks case, right, where famously there's lots of, you know, you see SEC enforcement actions all the time against, you know, the things that aren't allowed. But there are cases like a hedge fund can have proprietary satellite data of the Walmart parking lot and use that to trade earnings. And that is information that only that hedge fund has. But, you know, that is permissible. And so similarly, I think there's just like a complex set of line drawing exercises here where presumably we don't think government officials should be trading in advance of military actions.

48:04What about leading up to the Super Bowl, you know, predicting the Bad Bunny halftime show length? I mean, you know, people have that information. And so where do you think the lines should get drawn on insider trading? Yeah. And you said it perfectly. It's a very complicated question. And it's a complicated question for stocks way more and to a bigger scale than it is in prediction markets. The line that we take now is that we follow what the federal law is. So it's basically if you have an agreement. These are CFTC rules? Well, CFTC and SEC. They both have it. So basically, if you have signed an agreement that says you cannot share some part of data.

48:39So if I work at the Bureau of Labor Statistics and I have in my confidentiality, then I'm not able to say what the inflation number is before. Then it is you have like you cannot be sharing that data. But if you know if you know that they're going to be rehearsing the Thursday before the Super Bowl and you're outside and you're like, I hear Lady Gaga's singing. That's fine. And that's the same thing that, you know, a lot of hedge funds do with like Starbucks and people know there's more people, fewer people in the store. And that's the point. Markets are very good at incentivizing information.

49:08We want information to come to the markets, but we don't want it to be unfair. And if you have access to it in an unfair way, you should not be trading on it. Okay, so you cannot trade on information or you have some duty to hold that information confidential. We actually take it even a step further. For example, if you are a government official, you cannot, like if you're in Congress, you cannot trade on bills passing, even though I don't know if they have an agreement. Famously, Congress people can trade on stocks. Right, right, right. Right, so it's like we're actually taking a step further there.

49:35And we're working a lot of the regulators, because obviously it's a very new problem for them and for us, but we have an entire, part of being regulated, we have an entire surveillance division that is looking at every single flag. They pretty much don't sleep, and they're just trying to figure out everything. And we put out two cases two weeks ago of two insiders that because we're also regulated, we're able to charge them a lot of fines. So we charge them over five times what they made and all those things they banned and all that. What's very interesting to me about these stories is that you guys were doing that, where with the public equities markets, the SEC is extremely enthusiastic about enforcing their insider trading doctrine.

50:16What has the CFTC been like on this topic? It's a great question. So, obviously, the CFTC, you can think about it at three steps, right? The first step is our own surveillance and enforcement. Then the next step is it goes to the CFTC and their own surveillance and enforcement. The last step, if you go to the Department of Justice, you can. And I think that the biggest difference is when people look at the SEC cases, most of the time they take a long time because the exchanges that their research and their investigation and they put some fine, they block some on, and it kind of goes through the process.

50:48So it's still like that. Like every single trade on Kaoshi goes to the CFTC. They have every single thing. Every single case goes to the CFTC for them to review. So they might take action. We don't know. But now the ball is in the ball. Okay, so you refer cases. We refer cases to them. But we kind of do our first step of our first level of protection there. I'm curious, there are clearly markets where nobody knows the answer yet of some event in the future. So, like, it's sort of impossible to insider trade. And then there are markets where a single person can change the outcome. Like the mentioned markets in a speech or maybe a sports player doing a specific number of shots.

51:27So, like, how do you think about kind of that spectrum? Like, are mentioned markets a bad idea because they're just so inherently gameable? Yeah, or are they, like, limited in scale fundamentally? Mention markets like the Brian Armstrong Coinbase earnings thing and stuff like that. That's the worst example. But, yes, I think that, well, inherently, I think mentioned markets are actually great. If you think about the Fed, right, like the amount of hedge funds that are just sitting down being like, is he going to tilt his head this way or this way? And if he does that, it means he's not very sure.

51:55Fed meeting minutes are the original mentioned markets. Exactly. That's actually pretty much the, and it was because we just know that specific words being used mean very specific things and it can move the market so much. The same thing with Trump, right? If Trump says we're going to war, that's going to move the markets a lot, right? Or if he says a lot of things, like tariff that everyone else moves the market a lot. Even in, yeah, just a lot of everywhere, things that people say move markets and move a lot of different things. So I think the major mark is very important. Obviously, the person that is working on the speech or that is saying the speech cannot trade.

52:33And that's kind of how we enforce it. Like if you are Gavin Newsom and there's a market on what you're going to say, you cannot trade it and your staff cannot trade it. That's part of the political kind of cuts that we do there that they cannot trade. But I think that's the point. is like if there is a way to restrict some players in the market so that the market's fair and the market's positive and there's an economic utility for it, the market should exist. We shouldn't say like, okay, there are five people that could manipulate the market and the market shouldn't exist. Then you say the stock market shouldn't exist, right?

53:02So I think it's more about how do we build a system that is strong and resilient enough and with the right prohibitions that you can have the market. The other big debate you guys are in the middle of is just that about sports contracts generally. And, you know, I was trying to reason about my own thoughts here on this debate where, on the one hand, you know, the criticism is that with more sports gambling comes proven bad effects. You know, you can measure some of the bad effects that it has on people. And, you know, we have this, especially in the U.S., where there was a lot of legalization of sports betting over the past 10 years.

53:44And there's some data on that. On the other hand, you know, I have no real issue with alcohol, despite the fact that it has kind of a similar distribution where many people enjoy it, and then there's a very bad set of outcomes for a small fraction of the population. And so I feel like the societal discussion of, you know, the morals of alcohol and the morals of betting are different, despite the fact that, again, it's similar shape to the distribution. And, you know, also just thinking from my experience, And online sports betting has been legal in, well, legal is a complex term, has been available in Europe.

54:20Right, for a very long time. For a very long time. Basically, since the start of the internet. I knew there was all these cross-border hacks in Malta, and now it's a bit more regularized. But it's been available to people who wanted it for a long time. And life goes on, you know what I mean? And it hasn't led to any kind of major societal collapse over there. But clearly, this is one of the big debates that rages around Calci. And so I'm curious how you guys think about increasing access to sports contracts and the effects there. Well, there's a lot of parts to what we're saying. I think that the way that we think about sports, how we decided to first list sports, is obviously something that a lot of people are interested in.

54:58That's unquestionable. But also there's something that a lot of people do a lot of research and know a lot about. And there aren't traditional ways for you to make money on that that are actually good. or we talk about the winners, they get cut and all those things, and it doesn't really work. And regardless of whether people like that some people bet or dislike that some people bet, people bet. And it's just about what is the best way for them to have access to something that they can get exposure to sports. And I think that the whole point of markets versus a bookie is that markets are just objectively better.

55:28I think that it's almost, I've never heard someone make a case that a state-by-state regulated casino is actually a good thing. I'm actually hearing nowadays that a lot of like the paid propaganda by the gambling guys trying to say that. But if you push them to questions. And just to put numbers on that, the order of magnitude rake for sports betting companies is around 10%. And the order of magnitude for prediction markets is, you know, 1 % or a few points. Right. Is that the right numbers? But the predatory part doesn't even come from that. Like for sports betting, if you start losing, because they want the losers, they don't want the winners.

56:01If you start losing, the first thing that they're going to do is give you a bonus. They're going to give you$1 ,000 for you to come back or like a deposit boost and all those things so that they can hook you to keep you coming back because they want to incentivize the losers. We don't do any of that. The people losing the most money are the most profitable for sports bookies, which creates a bad incentive. Yeah, and we don't have that at all. And I think that the whole point is like, there's a moral question. Like some people are going to go into Robinhood or Coinbase or whatever and speculate on stocks and speculate in crypto and whatever.

56:34they want to do and some people want to speculate on sports and they should have the best the access to the best possible thing for that and right now it's just the sports books are just not it and we we really firmly believe that what we do in our markets are significantly safer uh for all of that and if you if you just take a stance of prohibiting it's like similar you said alcohol right it didn't change people just went to like a speakeasy and drink and people are just going to go offshore when there's way less protections there's no none of the self-exclusion the positive limits all those things that we do don't have any information about them and they're going to actually it's actually very bad uh bad for them so i think it's just this like prohibition concept just never really works it's also the whole policy discussion around this stuff is also very interesting when uh kind of reminds me of in canada um all the um liquor stores are run by the government or at least in british columbia and um uh you know you have the government saying this must be very carefully controlled but also we will sell it uh to have the revenue source and Obviously, that's much more of a factor in lotteries and things like that.

57:34It's all about money at the end of the day. The states won their money. The casinos won their money. It's just, yeah, it is what it is. Speaking of sports, one thing we were talking about was just what interesting new verticals are there going to be? And so I'm just curious, like, which ones are you most excited about? Well, I think that anything around dissecting, like, a stock into its sort of, like, more atomic components. So this would be like betting directly on NVIDIA GPU shipments versus… Or like Tesla deliveries or whatever. Like their earnings, you know, because like the… And then you can expand that to things like, okay, dissecting sort of the macro economy.

58:15Like what are the main sort of like factors are influencing the economy broadly? Like AI and like have a series of questions to price what's going on with AI. things like you know health scares like COVID and so on but the sort of where things get really interesting is this idea where so there was a paper written by Kevin Hassett around this idea that like as society gets increasingly more complex our asset prices our understanding of asset prices will naturally decay like entropy will go up because the things that influence or the sort of vector that, you know, like the number of factors. Much higher dimensional vector.

59:01Becomes very high dimensional, right? And if those dimensions, you don't have a good understanding of X1 to Xn, you cannot get a good estimate of Y, right? And so the paper basically says that you need infinite markets. And prediction markets are a disnotion of infinite markets, which is like you have to have a market for each one of these Xs so that you can then take that back into pricing traditional asset, getting good traditional asset prices. And an example of that this last week, so you know, there was the Citrini put out a research report, right? And it got a surprising amount of - People got obsessed with that.

59:40Yeah, I would say it got a surprising amount of love and interest. This is the AI 2028s we're all doing. Yeah, like 38 % in Bolivia. And I think, look, I think there's a little bit of like a society wants to believe if the AI is going to end us all. I think right now there's a bit of that. But this is where, you know, and that impacted markets, right? Like the stocks got, you know, there was a sell-off. And so we launched a prediction market on that. And well, before that, Citadel came out with a rebuttal and we launched a prediction market on that. And, you know, the odds are 10%, right? Of the economic scenario that they predicted being true as it turned to an eight.

1:00:12It's three out of five things. So they have like five conditions if three hit. Yeah, if three out of these five conditions hit, you could reasonably say that, okay, this outcome has somewhat materialized. And it's just 10%. Five out of five is much lower, right? So that is important. If you can put that back into pricing models, maybe the markets wouldn't have reacted that. Like maybe people wouldn't have sold off DoorDash because at least I believe, but you don't have to trust me. Maybe you should trust markets that this sort of analysis around DoorDash was actually quite poor. So one thing you're sort of envisioning is this world where everything has a price all the time.

1:00:46and I'm curious like is that a good world to live in and I would note that uh Stripe I think benefits from being private and not having the real-time price and smoothness for employees and comp and all that which is by the way there's some noise in the you know because like sub-second pricing sentiment swings publicly like there's on average in the long run it's a truth-telling machine but in the short run can be a panic so just curious for you guys to think about yeah Is that the world we want to live in? I mean, we're obviously biased because we love markets. We think markets are good. So we're definitely biased here.

1:01:22But I think our view on this is that it's always better to have more data than less data. If you don't think the data is good, if you don't think like whatever, the second by second stock price is good, you can just choose to ignore it. The world might not just ignore it. I think CEOs of public companies would say it is not always possible to choose to ignore it. I guess that's fair. but in a way it's like it's it's better to have the data and then use it as an input to something than than not but it when we say like um you know we want to have prices on on a lot of things it doesn't mean everything there are a lot of things that we wouldn't do like wildfires we don't do war terrorism assassination those things are bad and like there's a moral side of these markets and we're not gonna ever go there but in general it's in a world of social media is like you don't know what's true anymore my feed is like is it real is it not real did this happen it's just better to have a source an unbiased source of information that you can kind of use it for other things and i think that that value um is is is there but i don't know well i mean i think that like i don't maybe the simple frame for this is like you are uh increasing market efficiency for all these questions right like that's what this what's happening right it's um including potentially some events or things that relate to maybe private companies and i was thinking about the question is an interesting question like um why do companies go public right and why is it important to get like a you know real-time market price because there are downsides sometimes markets are erratic sometimes they overshoot in either directions but um the market on the long enough time horizon is a good sort of allocator it's a good weighing mechanism it's a good allocator of capital.

1:03:07And I don't really see that, like, I just think that, like, pricing a lot of these questions will just increase efficiency, make our function, our allocating function better over time. And there will be some net losers, right? Like some people that maybe capital shouldn't be allocated to, right? It's also a good feedback loop, right? Like if you're a CEO of a company and you announce something and it just keeps going down, you're like, okay, maybe I'm wrong. And I think the same thing you see with politicians where you can see in the live debate, if they say some answers and they see their price is going lower, they're like, well, maybe the answers aren't great.

1:03:41And I think a lot of these things, when we see even, for example, the use case of prediction markets in government, a lot of it is conditional markets, right? They can say, if we pass this bill, will unemployment go up or down? And you can price these things for better decision-making and just like a tighter feedback loop tied with good incentives. Do you guys feel like we have started to see, like clearly we have seen the effects of social media on politics, where politics is a different game now, and different politicians are popular, and the political discourse is changed by the existence of, I mean, first Twitter, and now, to some extent, short-form video.

1:04:18Do you guys feel like we have seen the effects on politics of prediction markets yet? Definitely. I mean, what are they? Well, the candidates are using the prediction market prices to inform. Sure, but that could just be a handy thing, whereas again, I think with social media, like the candidates are different. The debates are different. Reflexive. Yeah, yeah. Reflexive. I do think that what the markets are good at is that they are more unbiased by party dynamics. So if there is an underdog that the public really likes, there's a lot of like, maybe there's like a party that's like, we don't like this guy, we like this guy from the establishment, but the markets are very good at actually showing the real odds for that person.

1:04:57Okay, so you think the party machines have lost a little bit of power? I think you can shine more light into what people really want, which might not be necessarily what the parties want to put forward. I don't think we've seen that necessarily, but I feel like if I were to say, there was, for example, the Texas primary and I think that the polls were saying one person was really going to win, another person that was way higher in prediction markets won, and I think, right, and I think a lot of it was more of like, they give a more, a fairer view of the state of the race than a lot of the parties who closed.

1:05:29I think that we do see this a lot with also So, well, there's sort of the piece where people use it and that's sort of reacting real time to certain things. But I think there's some degree of depolarization. That's what Luana is alluding to. And in some ways, it's an antidote to social media. Like social media has really polarized. Like when you have two candidates running for a Senate race, we're sort of set, right? Like your feet is set. Like either your feet is saying the Republican candidate is awesome or the feet is saying the Democrat candidate is awesome. Prediction markets don't really have that.

1:06:02Because the people that are engaging in this are not in the sort of like who's great and who's, you know. I think what you're saying is social media feeds ultimately try to resolve up front. They're like, I need to figure you out. Are you a Democrat? Are you a Republican? Like, what post should I show to you? And pretty quickly, I mean, you know, people have complained about this phenomenon where you end up down a, you know, particular rabbit hole because they have pigeonholed you as kind of this type. And you're saying just prediction markets do not have that phenomenon. There's a little bit of a reverse phenomenon.

1:06:31Are we feeling too certain about this person? And I think that depolarizes things because the dimension is not, we're not one-dimensional anymore, which is like Republican-Democrat. And that's what you're seeing and what you're hearing about. Now it's like, well, this guy is kind of cool. And that's Calarico. And maybe he might do good in Texas even though he's a Democrat. The same thing happened with the New York mayor situation, right? Like everyone was like Cuomo is going to win 100%. 100 % Cuomo's going to win. There's not even a chance. And we were just seeing Mondani's odds going up. And I think it's just the progressive message was really working with New Yorkers and the markets were really seeing that uptick and that decrease in polarization really comes from people taking a step back and being like, what do I actually think is going to happen?

1:07:13I'm incentivized the right way. There's a bit of like an Iowa, New Hampshire effect here where in presidential elections in the US, there's like some big name leading into the election. Maybe it was Hillary Clinton in 08. and then Iowa and New Hampshire are measurements of the sentiment of those two states, but they also create narrative. And I think what you guys are saying is prediction markets create this Iowa-New Hampshire effect where they can create narrative in a way that changes the ultimate outcome. I don't know if it changes the ultimate outcome. I think it sheds light into what the ultimate outcome is going to be.

1:07:49And potentially changes it. Well, I think... There clearly is some reflexivity, right? There's always, but it's like with the polls too, right? Like the, yes. I mean, there's polls. Aren't you guys hiding your lamp under a bushel here? You're like, well, we're not changing anything here. You're just like. I just think that the one thing I will say, the reason why we're like. Like prediction markets are a big deal. It's okay to say they'll change things a little bit. High odds don't always correlate to like a good outcome. So you saw Mamdani when his odds were 94 % on Kalshi. The thing that he was messaging pretty consistently, and I think there was a little bit of worry there, it's like, you got to show up.

1:08:23Right? Because if you're very high odds, that could also lead people to be like, okay, this isn't it. So it's not as clear. And I don't think this changes things more than polls changes. Does that make sense? So the response is more like in a vacuum, yes. If you had nothing else, if you didn't have social media, if you didn't have news, if you didn't have any of that, yes. But because we have all these other things and you add prediction market to it, like the impact market. But I want to make one point that I think is actually very interesting. And we're seeing this often. We'll be the judge of that.

1:08:49Okay. You can judge that. Let me know if it's interesting. but a lot of times when you see people start participating in prediction markets they get more engaged in the underlying they legitimately just get more informed it pulls people in it pulls people in but to do research now you have because you have some skin in the game or you're about to put some skin in the game you read everything changes you're not just like saying something crazy on Twitter anymore you're putting money and now it's like let me read let me actually figure out oh who's this person what's happening it's like are they pro this are they against this what's their view and everything and you go because you know it's like amazing because this happened a bit in the New York race right like or it happened a bit with Brexit people voted for Brexit because oh no we want Brexit and after they voted for it they're like oh god wait I don't think we wanted this wait wait we didn't even understand what we were voting for right like and I think this heightened engagement is very good like you know like it engages people further to like learn and understand you know in sports basically if you ask sort of like a lot of the leagues they would tell you the same thing where people got more engaged with the statistic which player is good what's happening and I think that will happen is already happening in politics, which is a good thing.

1:09:53I think that the... I'm going to say something and then I'm going to call it fine. I'm saying, I think that politics is going to get better because you're going to have a way faster feedback loop on the messaging and the policies. Right now, when a candidate says 10 things and they win or they lose, you're trying to make one assessment of so many things that the candidate did and did that go well or not and which point was it? Even if you do a poll, it's like always delay it is a very specific sample. But now you can have real time of like, they said this, what was the response? And you can get that and kind of like that faster feedback loop, which I think makes startups great, right?

1:10:29You're able to iterate very fast. And I think if candidates are able, everyone wants to win at the end of the day, and if they're able to optimize their message to what really people want and what policies people want, I think they're going to end up being better because they're just going to know what people want better. It's like you get a score on all of the different things you've done, not one score that encompasses the good end of the bad, yeah. When you ship a new feature, you're able to have like 10 metrics and you're like, okay, this went up, this went down. And you're able to, markets can kind of contribute to that, but also like, I think to a lot of other things as well.

1:11:00Music with like charts, when someone listens to the song and they're like, definitely not going to hit number one. You're like, okay, that was that song, so we should do something else. Do you guys try to use prediction markets in any way internally to make decisions? Every single decision we make is always probability. Even the election lawsuit, right? When we're doing it, it's like. But that's you guys evaluating the probability. Do you ever think about creating markets for your employees to participate? So we have one net, which is as a regular exchange, we can't trade. But we're doing like internal policy.

1:11:32There's like a separation of church and state thing there. Exactly. And so we've been asking that, we've been working with regulars, could we do something small? Like could we do small dollars where, so that, you know, because obviously that's one that we want to implement. And you can't even dog food the product, I guess. And then dog food the product. which has been hard. It's hard. Everyone's on demo. And I'm sorry, employees cannot train in their personal capacity? They can't. Not at all. Wow, interesting. But yeah, that makes it very hard when you, as you say, you just can't dog food. You can't try the product.

1:12:00People at Facebook use Facebook and that's how you make the product good. Right, right. So that's why it's so important for us to just be like asking the users all the time. Yeah, yeah. That's so interesting. It sucks. But the power users, the super forecasters are a lot of what influences sort of where it goes because they're very engaged. You guys presumably spend a lot of time with those power user super forecaster types and just have them on speed dial yeah they're there they won so you want to make sure they're they're happy last question where do you guys want to see prediction markets policy go like when you're talking to someone in government or if you had a magic wand what are you arguing for our sense as a company and i think this may differ a little bit from like i would say like your average uh tech company or big tech company.

1:12:49So we are pro-innovation. Innovation needs to happen in America. You know, we have to lead and we have to do it right. And we have to win. Like we have to be, you know, all the things that Americans want to do or we need to win as a country we should have here. But we're also pro-regulation. And so at a higher level principle, like there's usually this tension that, you know, generally it's like, you know, it's like the policymakers like want to regulate. I think you're maybe more like a traditional financial firm in that way, right? Where maybe Silicon Valley, you know, a lot of firms grew up in an unregulated way, but financial firms have always had a regulator and that's just a fact of life.

1:13:25It's just a constraint for you to work with. So it's part of the culture. And again, we spent four years getting regulated up front. So it's part of, but we believe in regulation. Like I think it's important because, you know, regulation is a bit like insurance. It's like it's protecting you from things going wrong and bad times. And so when I think about like, okay, where this lands? I think anything that is oriented around preserving these in America and making sure we win, but then elevating the fairness and transparency of the markets. Anything that's oriented, like how do we make it more fair?

1:13:54Ban insider trading. Add more restrictions on, for example, like, you know, government officials, members of Congress trading on, like, you know, information they shouldn't trade. I'm obviously a big fan of, like, banning insider trading for members of Congress. We talked about it. Presumably you mean just banning trading, period, for a member of Congress. I think it's not a bad idea. Yeah, that's how we kind of think. But I think, and then things around like, you know, creating also social fairness and transparency because of all the questions that we asked. Like if people are basically trading on politics, let's have all the trade data be as public as possible so anyone can audit it, anyone can see it, which is a good thing, right?

1:14:31Now you don't know, like imagine a poll where you can check every single person that basically got, and the general public can check who was polled and what the sample was like. and then anything around customer protection because that is important long term in the sense that like when you build a consumer product and it goes mainstream there is like a massive sort of like burden on the companies to educate and you've seen it like you know over and over and in our case you know you want to make sure that people like know what they're getting into they're not like overextending themselves in terms of like how much they're sort of trading They're not, like, getting into an area of discomfort.

1:15:11And how do you kind of, like, you know, we can do as much as we can do on the marketing and on the product side, but, like, we need policymakers and regulators help to basically make it an industry standard, but also help us elevate ours. By the way, we're pro that. I think that, like, even the classic retail brokerages should also be adopting a lot of these customer protections that we're talking about that they don't. And I think that every retail trading platform should be taking a lot of these steps. Yeah, I mean, that's sort of our general view. and we hope that this is sort of the direction that things take.

1:15:40Because, you know, there's kind of, you can have a variety of views, right? And some people believe that like, hey, like, you know, any type of speculation should be banned, whether it's in the stock market or crypto or prediction market. We don't believe that. Like, you know, we think that would be a bad outcome for all the reasons, because there's a lot of upside to having liquid markets and a variety of different things. But also because if you ban it, you're actually heightening the risks that you're trying to prevent because now that activity is going offshore, right? and where you cannot monitor it or police it or do anything to protect it.

1:16:11Awesome. Thank you, guys. Thank you.