Thomas Peterffy on Interactive Brokers' Plan to Professionalize Prediction Markets | Odd Lots

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Thomas Peterffy discusses the difference between prediction markets for institutional versus retail investors, drawing a parallel to the stock market, which includes both serious and "silly" stocks. He emphasizes that the mechanism of prediction markets shouldn't be blamed for the trivial questions some platforms list. The goal is to gather consensus opinion from experts and deep thinkers to inform decision-making and future planning.

Joe Weisenthal asks Thomas Peterffy if he believes institutional investors will eventually use prediction market instruments to trade on events like a recession in 2026, and if these contracts will become high-volume. Peterffy expresses strong conviction that they will, stating that prediction markets offer an opportunity to gather expert opinions and express expectations about the economic and social environment, leading to better-informed decisions.

Tracy Alloway questions Thomas Peterffy on the hurdles preventing institutional investors from fully engaging with prediction markets, particularly the low liquidity. Peterffy compares the current state of prediction markets to the early days of options markets, noting that it takes time to build sufficient liquidity. He highlights Interactive Brokers' platform, Forecast Trader, and its potential to attract institutional clients. He notes that Kalshi has had to add sports betting to become profitable.

Joe Weisenthal asks if Interactive Brokers' focus on serious, non-sports, non-pop culture contracts gives them an edge in attracting institutional investors to their prediction markets. Peterffy confirms this is a deliberate choice, aiming to concentrate on questions relevant to clients' investments and avoid distractions.

Tracy Alloway questions why prediction markets didn't emerge sooner. Thomas Peterffy reveals that Interactive Brokers started developing prediction markets about 10 years ago but halted due to concerns about obtaining a banking license and potential SEC scrutiny. They released the system for phantom money, which eventually inspired others like Polymarket and Kalshi. Peterffy was upset when Kalshi obtained a license from the CFTC and attempted to buy the company but was unsuccessful. He then sought his own license, which took three years to obtain.

Thomas Peterffy states that Interactive Brokers can support developing prediction markets because of their profitable business. Joe Weisenthal asks about providing leverage for prediction market instruments. Peterffy acknowledges the risks associated with leverage, noting that many brokerage firms fail due to it, but confirms they are working on structuring it. Tracy Alloway asks if prediction market prices could become standard reference data. Peterffy agrees, stating that it could provide a clear probability for events like Fed rate cuts.

Tracy Alloway questions why prediction markets would be needed to gauge Fed moves when the bond market already provides that information. Peterffy clarifies that it's the Fed Funds market, not the bond market, that is relevant. He suggests that economists will eventually participate in prediction markets, trading their own positions and being judged by their performance. Joe Weisenthal jokes about traders' dislike for economists, and Peterffy admits that economists can be confusing due to differing opinions. Joe asks if IBKR would allow users to trade prediction markets from other venues via their platform. Peterffy confirms they will offer a consolidated feed of contracts from various platforms.

Tracy Alloway raises concerns about potential insider trading on prediction market platforms, asking how concerned institutional clients are about this. Thomas Peterffy shares that he lost half his initial capital due to insider trading early in his career, but surprisingly, he is in favor of not having rules against it. He argues that all information should be available as soon as possible for the benefit of society.

Joe Weisenthal presents counterarguments against eliminating insider trading laws, suggesting that it could deter participation in capital markets if individuals feel they cannot compete with those with informational advantages. He also argues that corporations may want to protect their secrets and not have them easily monetizable. Peterffy responds that companies should protect their own information rather than relying on national laws.

Tracy Alloway notes Thomas Peterffy's early automation of market making and asks about his perspective on AI compared to the early days of electronic trading. Peterffy views AI as a significant technological leap, but fundamentally a higher-level programming language, similar to the evolution from machine language to natural language. He emphasizes its power due to its access to vast amounts of data.

Thomas Peterffy states that automated trading has existed for a long time, and Interactive Brokers started their first automated trading systems in 1983. Joe Weisenthal asks about the options pricing model Peterffy developed. Peterffy explains that he used an Olivetti computer at home to run simulations and determine break-even prices for options, eventually developing a formula and code. He mentions Interactive Brokers' Probability Lab, which displays the probability distribution associated with future price changes derived from option prices.

Tracy Alloway asks if Thomas Peterffy knows how to code in COBOL. Joe Weisenthal asks about the timeframe for prediction markets to become big. Peterffy declines to give a specific projection, stating that he finds projections from consulting firms difficult to evaluate, but he is confident that prediction markets will become very big because they are extremely useful.

Joe Weisenthal notes that one of the contracts on IBKR is related to UCLA's out-of-state tuition and suggests that this could be a useful instrument for him to hedge future college costs for his children. Thomas Peterffy confirms that college tuitions were considered for listing. Tracy Alloway asks about the implications for capital markets if prediction markets take off. Peterffy explains that the money put at risk is invested in treasury bills, which finance the deficit.

Joe Weisenthal asks if there is anything the CFTC could do to further the prediction market. Thomas Peterffy states that the big regulatory problem is the uncertainty around whether questions concerning specific companies would be considered securities or commodities. He suggests that it would be useful to ask about the future developments of companies like NVIDIA or Microsoft, but the lack of clarity prevents this. Joe suggests merging the SEC and CFTC, which Peterffy supports.