Why Susquehanna Is Building a Prediction Markets Business

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Hello and welcome to another episode of the Odd Lots podcast.

I'm Jill Wisenthal and I'm Tracy Alloway.

So, Tracy, we're still rolling out shows from our live show on May twenty eighth in New York City at City Winery. As we discussed in our last episode from this show, it had a sort of future of markets, future of trading theme to the night's conversation.

Right, and if you're talking about future of markets and trading, we have to talk prediction markets, right.

Yeah, that's right. So in addition to the fact that there is the quote AI trade unquote, the other big thing going on in markets is the sheer explosion of instruments with which people can trade. Right. So it's like you used to have stocks and options, and then the options started getting more exotic, like zero day options, which you love and so forth. But now it's like, if you could think of something that would resolve in some way, whether it is snowfall in New York City, Tesla deliveries, or how long a halftime show is at the Super Bowl, there probably is a way to bet on it.

Right, And so one of the big questions is whether or not these markets are going to take off from an institutional perspective, whether or not you're going to see more professional investors get into the business of betting on not just snowfall in New York, but maybe halftime shows and that sort of thing. But that said, we do have some institutional participation in the market already, because you have market makers that are starting to come in to try to make these markets more liquid.

Yeah, but you're really and just said the key thing here, which is, we know there's like a ton of liquidity for like the sports betting, et cetera. Like that's not the problem that needs to be solved. It's these other things where in theory these might be useful instruments for hedging some sort of economic risk. Maybe not the Taylor Swift one or the half type of show ones, but some of these other ones. But like, in theory, some of these contracts could be useful for hedging, And so the question is, yeah, but will anyone use them? And so on this discussion, we really had the pleasure of someone who has got very little media in general and who is right in the heart of trying to essentially solve this chicken and egg problem. Listen to our conversation

with Jeremy Malletts, the head of Prediction Markets at Susquehanna International Group. All Right, why don't you tell us just let's start really simply, what does the prediction markets desk at Suskahanna do.

So essentially, the main function that we do is market making. So we're the main liquidity provider, one of the main liquidity providers on quite a lot of platforms, and that means we're we're providing liquity and everything from sports to economics to politics.

But I'd say also a big part.

Of what we do is we were the first institution that got involved in prediction markets in the first place, so we're really trying to have a role of kind of being a shepherd for other institutions as they get involved. So I'd say it's a two pronged goal really of providing the liquidity for the ecosystem to help it to grow, and then bringing others into the ecosystem, which I think has been one of possibly even the more important role of what we've done to this point in time.

Wait, can I ask an even simpler question, which is I kind of feel like Susquehanna is like the salesforce of the finance world, where I have this like vague idea of what you do, but also not really what does Susquehanna do.

Well?

My wife asked me the same thing. It's her birthday, by the way, so happy burdge to her.

But it's incredible that you're here. I know, I owe her big time.

So we're primarily a market making firm, and our bread and butter has always been options, So we make markets in pretty much every option eq equity options. But obviously we trade a lot of instruments across a lot of things, and we just we have a culture overall that's very much looking for new opportunities and thinking about things and probabilities and kind of you know, it all starts from Jeffioss, our founder. He loves things like prediction markets. So you know, we have a lot of random businesses at Susquehanna all over the place. You wouldn't believe the number of things that we do randomly, And it all comes back to the same culture we have of thinking in Baysian probabilities and trying to think of everything in terms of break

it down into what the odds are. But the bread and butter remains market making, and we try to use that to kind of make a market or bring a market to any asset class we're looking at.

Let's talk about Okay, there's some contract out there. Who is gonna win, you know, the Texas Primary Like, let's just say why you know? And so there's an exchange and there's an instrument and it's either going to end it a hunt or zero, et cetera. Why does this market need market makers? Why can't it be entirely peer to peer such that if all of us in the room just wanted to trade, we make a price amongst each other on an exchange. Why is a market maker an important part of the infrastructure for this to work.

So if you have a market where you have an insane amount of people that are all trying to trade all the time, you might be able to make.

It work without a market maker.

Okay, But what a market maker is really doing is it's helping to bridge the gap between the different people who are trying to trade. So, Joe, you might want to trade now, and Tracy might want to trade in an hour, right, but if there's no if but that doesn't help. That doesn't help you if she's not there now.

So we're basically saying, hey, we're going to be there when you want to trade, and then we're going to wait and when Tracy wants to trade, we'll take the other side of it. So we're basically a function that matches the buyers to the sellers across time and also across size.

So how big does your balance sheet have to be to be like dedicated to this particular business, Like how sizable are you with an entity like Calci?

So you know, it really depends on the way that you do it. There's a lot of small, independent groups or just individual people who are able to be out there and they make markets and their goal is to try to balance it, and they have to think a lot about capital. We are very fortunate that capital isn't generally constrained for us, right, So that's one of the things that it's an advantage for us. But it's also something we can bring to the market. We can provide much much larger size on things. It's why we're well suited to bootstrap a market and to do institutional type size because we're not constrained by capital in that way.

And do you generally try to stay like risk neutral. No.

You know, I think that is pretty deeply in our culture that obviously, all things equal, we would like to be risk neutral, but we're willing to put ourselves out there and wear a position, and in general, on our options trading, we tend to wear house a lot of risk for the street. Sometimes there's just something where everyone needs to hedge risk in one direction and someone needs to be on the other side of that, and that's an important function in prediction markets, especially when you think about use cases such as hedging where you've got some global risks of the world. Everybody needs to hedge that risk on one side. Someone needs to be on the other side, and we're willing to hold ourselves out there

to do that. And you know, there's a lot of pieces that go into being able to do that. Obviously, when you're not neutral on a risk basis, you have to be more confident that you're right. But you know, that's a lot a big part of what our team has driven to build.

So this sort of.

Leads into the next question, and it's maybe the multi billion dollar question of prediction markets, which is, Okay, we know that there is a huge amount of the prediction markets business, which is just sports betting under a slightly different form. But you mentioned hedging, and this gets to the core question, which is, in theory, there are a lot of instruments on these prediction market platforms that could be useful hedging trurement for corporation, say a market on snowfall in New York City, which might affect an airline or something like that, maybe they want to hedge that.

When I look at the platforms currently, I see a price for like snowfall, but I don't see anywhere near the volume level that say, would really justify like an airline. Could you know, you see one hundred and fifty thousand dollars in volume on whether there'll be between six and eight inches of snow. That's obviously nowhere near deep enough for a serious economic actor to participate in. So where are we on that in terms of the promise of actually useful instruments for hedging.

Right, So, when we first got involved in prediction markets, our real role was to bootstrap the liquidity. There were no institutions yet, and it was largely going to be a retail product. We were bootstrapping for large volume retail liquidity. Now our next challenge is we want to bootstrap institutional liquidity.

So yes, you might look at market that doesn't have seem like it has enough volume for an institution to hedge, you know, tens of millions of dollars of risk, but that's you know, part of the reason that I'm out here doing a podcast today is we're trying to make sure that people start to understand this is viable and we're putting ourselves out there that we will be willing to put that kind of risk. And we can put out that kind of risk on a contract where far less volume is traded. And that's because what the prediction markets really provide is information. It's a price discovery mechanism.

So you have this phenomenal community of super forecasters that exist on a prediction market, and it doesn't take as much volume as you would think to get to a fair price. And that allows us to say, hey, okay, we've got a reasonably fair price on this prediction market. Maybe it's only traded one hundred thousand dollars, but we know that there's been a lot of smart people that have looked at this. We can do our own internal vetting at the same time also, and now we're comfortable going out there and saying we're confident enough in this price because of the price discovery mechanism that will make tens of millions of dollars of risk to a company that needs to hedge its risk of what you know,

some regulation or straight up homoose or whatever it is that's happening in the world. So you know, someone needs to go out and do that. And I think we're kind of uniquely positioned because of our culture of saying, yes, we are willing to take that risk, and yes we want prediction markets to grow.

What have your conversation's been like with institutional players so far, Like, what do they say is their main either constraint or I guess reluctance to get on some of these markets.

So the first piece is the exact thing that you just brought up. Awareness They look at the markets and they might say, well, I don't see how we could actually hedge some of these things because there's not enough volume and liquidity, to which our response is we will be the liquidity, you know. Then the other question is, Okay, well, we sort of need our compliance to get to get comfortable with this. This stuff is so new, what's the legal landscape?

What? You know, how do we get this stuff even over our firewall?

I think institutions we're always going to be the slower moving player relative to retail, and so that's why we really want to sort of hold some of their hands to go through this and figure out a lot of different ways that they can use prediction markets. Some of it might be an institution connects to a prediction market platform, does a block trade on an exchange with us. It could be that a trade goes up off in exchange as a swap, but it's licensing the exchange market data.

And we're trying to create as many different setups as possible so that people can do these trades. And we're going to basically be, you know, be the facilitator to say, okay, you need a hedge. We're going to figure out how to let that happen.

See, this is really important. So if I look at a contract and I see a number of there like one hundred and fifty thousand dollars, it's possible that there there was a trade, an off platform trade of much bigger size that was not printed on that But that was more by le swap form, and that's is that currently happening.

It is possible. I'm not going to go and say that that's a big thing that's happening.

Yea.

We're trying to build out the infrastructure to have as many options as possible because we want institutions to start moving and the more they do it, the more they're going to really Like.

If an institution, again, let's go to the airline hedging snowfall, sure would they have a relationship with you? Would they go through a prime broker who then has a relationship with you, Like what is the actual sort of like chain of phone calls or whatever that happens.

So it can be both.

But ultimately, when I think of what we're really good at and what we're not really good at, we're not necessarily the best in the sort of know every single airline customer business. So we want to work with a lot of those other intermediaries. That could be a broker, it could be a bank, it could be an insurance company.

The people who have those relationships and are in the business of constantly advising this is what you should do, we understand. We want to work with them and they could have a very important role in helping to be a part of the infrastructure that gets it from the customer with the risk to us being the one that has the other.

Did Joe's chosen a pretty like reasonable contract, I would say for his example there? But like, are you committed to making markets in all the contracts available on these platforms? Because I'm thinking about you know, like the Return of Jesus Christ or will aliens invade?

How would you even go about.

Like the halftime show?

Ye?

Right, yeah, So we don't make everything, and honestly, we're not the best to make absolutely everything some of you know, some of the things that you might say that something perhaps in pop culture, we're probably not going to be that good at it relative to others.

Right, there are certain things they're trying to build that capacity up.

Well we'll see, we'll see, but you know that there is a community of a lot of people that can make a lot of that and make a lot of these types of markets. And what we want to do is we want to scale our sort of capacity with our technology, our quantitative models, our sort of very trader driven insights that we have in our capital. That's where we're going to add the most value to an exchange.

If something just requires a bunch of people to dig into it the universe, of all the different super forecasters, we're probably not as necessary. So you probably don't need us to know something about when Taylor Swift is going to get married. But the fact is that the things that have the most economic value tend to be the things that need us the most. And so that's really where we try to play. And I think it's great that the ecosystem has these complementary forces of the community of all of the super forecasters and then the people like us, who both kind of have different skill sets.

Do you see right now? So again the people say, yeah, these are just it's sports betting, et cetera. And then maybe every two years or every four years there's some election activity, maybe there's some trades that are sort of like look like cryptodervatives, et cetera. When you actually look at today's volume of activity, do you see a meaningful shift towards what polite people who wear suits would say, like real things. Is that happening?

It is, yeah, And so when you look at the volumes, obviously there's a real percentage of the volume more you know, more than half of the volume certainly is sports. Yeah, and there's a reason for that, right. Sports has been a big market in the United States for a long time, and it's happened in kind of a fractured way across a lot of different states, and there's certain states where you can't do it, and it's a different regulatory system everywhere.

But there was a big market that existed, and then prediction markets basically came around. They provided a better way for sports to trade, So it was natural that there was going to be this massive base from the start. But what we're seeing is it's dragging up all of the other things. So it's brought awareness to prediction markets, and the more we see that, the more we see everything else growing. And by the way, a lot of that other stuff, the real market, you know, they're growing at a faster rate than sports, just from a lower starting point. And our goal now is really to you know, boost that with the with the hedging cases, which you know that's growing too, but it's not a huge part of the market as of now, and we understand it

needs to be. From an ecosystem perspective, it's essential that those hedging trades become a much larger part of what the market is.

So if you're a market maker for an event contract that's something like the FED is going to raise rates or hold or lower or whatever like, that's pretty similar to something that you might see in traditional markets. But how different can you like explain it to us from a mechanical perspective, how different the market making process would be for a prediction market contract versus like a traditional option, right.

So honestly, it there's not a one size fits all because there's so many different things out there. So if you're thinking about kind of what's the FED going to do next, there are instruments that capture that reasonably well. And same thing as you know, what's the price of the S and P five hundred going to be at the end of today, for example, there are other instruments out there that capture that reasonably well. And really this is just distilling it into a way that might even better capture the idea someone has. There's like quirks to the other types of things that you might have. There are the proxies, so we can translate what's happening in sort of like you know, the traditional financial markets to

prediction markets for other products that it's sort of is this random, one off event going to happen in the world. Is the strait of Hormoose going to be opened by the end of August? Is Kere Starmer going to be out as prime Minister? That stuff requires a lot of independent research. But the good news is that there's so much information contained within the prediction market itself. So one of the core market making principles we have is, you know, it really honestly comes from you know, kind of a thing we teach with poker of understand what other people know and what other people are doing. We can learn from the markets seeing where they are, this is what all these other super forecasters know. We can combine that

with our internal research and then get to a number. So that's you know, some things kind of have to be we draw it up and figure it out like that. Some stuff is we can use the information that's in other markets, and some stuff is we're gonna build a brand new model to figure this thing out, because that's kind of in our that's kind of in our DNA to say like, all right, here's a random thing, but you know, how are we gonna We're gonna have to figure out compute. Right, Let's let's figure out how to model compute and you know, we'll build it.

So one of the concerns or one of the things that people talk about with prediction markets is the possibility of insider trading. And you know, like obviously, like when I think of like a market making firm or some of these firms that do a lot of flow in volume, you just sort of assume there's a lot of noise and it all sort of washes washes out, right, how does it change you?

Like?

You have to think, like if there are participants in the market that are like not just forecasters here, like not just people who are good at predicting things, but deeply informed slow where they maybe just know the answer already, are you able to spot that? Are you able to sense that? And does that change how you think about risk management within a given market?

Right?

So, I guess the insider trading is definitely something that that comes up. And there you know, there there's certainly been plenty of articles that are written about it. I think there's a couple a couple of things to point out there. The first one is that there's actually really two types of prediction markets that it's not always clear to people what the distinction is. But there's the regulated prediction markets such as CALSHI, such as rough Era exchange that just launched, such as you know CME has one and Polymarket has a regulated exchange. And then there's the crypto based decentralized plan it platforms, and those are you know, they don't have KYC right and they're crypto based their DeFi.

So I think most of what you've seen, the vast, vast majority where people find something that's insider trading based is on the DeFi platforms because there is KYC on the regulated space, and that's why, you know, we are participating in the regulated space.

So that's the.

First important thing is if you're in the regulated space, you're much more protected. The other thing is, you know, insider trading is something that does exist everywhere, and there's a mechanism that works to suss it out, and that's reporting from the people that are in the market. Generally, one of the things that we're always paying attention to is what are the incentives of the person on the other side of the trade, And when someone's insider trading, it's a lot more obvious that Okay, well what are the incentives? They don't make sense. The thing then happens, and okay, we can make a pretty decent basy and update that like this was probably insider trading and report it.

And it's actually easier in prediction markets because this is more obvious. There's a million reasons that someone can buy Apple stock, but like there's not that many reasons that someone can buy like is Maduro going to be out?

So if you see a lot of people slamming that.

Right, right, So it's actually easier to spot this stuff. And by the way, like one thing we're extremely happy about is the DJ is now even going after the you know, the crypto based platforms where you know, people kind of I think they kind of knew. People probably thought they were safe. You're not safe in crypto, and actually everything's on the blockchain, right, so you'll get caught.

So there is an infrastructure, especially in the regulated space but also now in the unregulated space for catching people that do it. And I think that's why you don't see more like that's what stops insider trading. People don't want to get caught. This is new. People probably thought like, oh I can do it in crypto and won't get caught.

Now they're like, oh, I am going to.

Get caught, okay. Aside from insider trading, one of the other concerns or criticisms of prediction markets is the idea of you could have whales basically in the market, like people with a lot of money who are willing to spend it to perhaps like influence a particular probability with the hope of I guess, influencing the ultimate outcome. You must have pretty good visibility and to order flow. Like, how realistic is that concern from your perspective?

Honestly, I don't think it's something that's really come up for us to this point in time. Like there are concerns we have around certain things in prediction markets, but realistically, like there's a lot of people in prediction markets, deep pockets, certainly us, and we're pretty good at, as I said, understanding the incentive of who's involved and if someone's going out there and trying to move a market to like influence an out to influence an outcome, you know, if it's I guess it depends on what the outcome is.

If it's an outcome that's easy to influence. We try to avoid those markets in the first place, so we don't trade like mentioned markets. Right, someone could put a bunch of money on something and then you know on this podcast for apps and then say, right.

But does everyone is does everyone know like a mentioned market is like will Joe, Tracey Jeremy say the word like dogecoin exactly.

Crazy? Right, So we're not going to run We're not going to participate in those.

If you're worried about something like that, like you probably shouldn't trade those either. Like they're more on the on the side of just like oh this is you know, if if people want to punt around and them find we're not in those. But for more serious markets, I don't have that much concern if if there's someone trying to do that that they're you know, if it's if it's not manipulable, particularly it's something that's real and someone's just trying to move the market, the marketplace is probably going to figure it out and take the other side of it, and if they can actually influence the outcome in a meaningful way, then it probably needs You probably need to think about what the settlement mechanism is and

you know, those are the types of markets we try not to get involved in. But I don't think you see a whole lot of that in the market.

So, as you mentioned, you're not you don't make a market in every market, and some things are more logical. Do you have when you say, okay, you're market maker for Kelshi, do you have a list of like this is what we do and don't or is it like like I'm sort of in my mind the way I think about your role a little bit like Alloyd's of London in this sense that it's like, okay, so someone has some risk and then they call you up and they like, can you make us a price for this?

So is it a set list or is it like you take it as you see it? Yes, okay we can make a market. No, this is not something we're going to participate in on a sort of like per market basis.

Right, So it's a little both. There are some markets that we do all the time. We sign up for obligations, we're going to be out there all the time, twenty four to seven. And then there's some things that we kind of do on a more ad hoc basis, Like you know, it comes up it's important. We think we have can have a meaningful role in the market, and we just figure out how to get involved in it.

So a little of both.

I don't know if you read it, but there is a piece in I think it was in the New York Times this week about sharps in the prediction market, and.

You know, people definitely read yeah, people who are making a lot of money. Oh yeah, that's right.

Okay, you better have read it.

I have read it, okay.

But there was someone quoted in there who is like an independent trader in prediction markets, and they said they interviewed at Susquehanna, but the firm said that, like Susquehana is not allowed to scrape certain data or it has certain data restrictions. And I guess that made the job unappealing to this guy because he doesn't seem to have taken it. But like, what are your data restrictions exactly?

So we're you know, we have a large franchise and a large reputation that we need to.

Take care of. So we're not going to violate the terms and conditions of a website.

Right if you're if you're a random person who's doing it, like you probably can do that and you're probably not going to get in trouble more likely than not, although that's certainly not.

People like putting in URLs that haven't gone live yet, right and they have some feel and do they test them out.

Like it's not even necessarily I mean, that's a thing that can happen place. But it could just be like you have a website that has terms and conditions. It says like you're not permitted to scrape this data, right, and some and like you know, plenty of people scrape the data, right, and we're not going to scrape that data, Like, we're not going to violate the terms and conditions of a website. So we hold ourselves to a more conservative standard when it comes to those types of things. So I think that I think that person was probably just referring to, Hey, you get restrained, restrained in some ways if you want to work for.

Us in the usual like institutional.

Things like we're going to be very careful when it comes to things around our reputation. But you know, but I think that that's probably you know, there's a lot of advantages to working here as well.

I know this isn't a prediction markets question per se, But like, do gpu markets that we talked about the first half of the show, do they have the sort of contours of what to you look like could be something very actively financialized market.

Absolutely, I mean it's something that the prediction markets are looking at. And really, when I think about what's made prediction markets so different, like what actually changed, it's speed to market.

So so you.

Know, it's funny when we first started wanting to get involved with prediction markets, of like a little bit of an origin story where I have a friend who is a CFO of a musical instrument company during the first China Trade War, he was worried that their company might go out of business because they imported instruments from China.

And we I was like, well, I'm a macro trader. I could hedge this. It's what I do all the time. We actually tried to list a product and it took about a year and it was just too slow.

And then you know, where did you try to list it?

We tried to list it with my ex and you know, just that was the process for listing a future and now we got now we you know, prediction markets came around and that process went to a day or even inside of a day. So I think really that's the most that's the real valuable thing.

That happened with prediction markets. And I think that with compute, you see this.

You see this ability of prediction markets to potentially move very quickly so they can launch a product. There's there are products and prediction markets that have compute and these other things that kind of look like compute.

You might say deram prices.

People worry about that all the time, right, the shipping costs, these things that are kind of like a commodity, but they don't really have a commodity. Prediction markets can be speed to market and the system works in that way. So I absolutely think it's something we're thinking about, and I think they can totally have a role in that ecosystem.

So, just going back to the very beginning of this conversation, you're head of macro trading at susque Sorry I can't say head of macro without cracking up. That is, you're head of macro trading but also prediction markets at Susquehanna, which is like kind of an unusual combined role. Like, what is the idea there is? Is there some synergy between those two markets that you're trying to capture.

You know, honestly, it all just comes down to the election. You know, as head of Macro, I had sort of a niche for trading the election, and I kind of got exposed to prediction markets because they were trading in Europe on betfair and we would be we had you know, you're entity, and we were involved with it there and I saw the value of it. And I think twenty sixteen election was like a place that it was really valuable because people had these massive risks they wanted to hedge.

People would do it with these proxy products.

Banks would put out baskets of like well do all these put put together all of these names, and the broad market consensus in twenty sixteen was that the market was going to be down five to seven percent if Trump won.

And it turned out the market was five minutes.

It was for like five minutes, yeah, fun, but yeah, the next by the end of the next day it was it was up right, And so you know, the hedge didn't work, but we saw like the prediction market worked, Like if you if you actually just hedge this in a prediction market, it would work really well. And so Honestly, there's not. It doesn't seem like there's that much synergy.

It's more just it evolved out of that of saying like, hey, we're involved in this space, and we see how valuable prediction markets can be, and we really want to make it happen. And so I think that it's really just kind of an evolution as opposed to this is how we would draw it up from scratch.

Everyone what a gain it was. Get sent one of those like basket trades where it's like trade this basket. We could do one hundred million dollars this, you know, DRAM winners, DRAM loser's basket. Anyway, Jeremy Mallett's, head of prediction markets in Suskahanna, thank you so much for Thank.

You so much for having.

That was our conversation with Jeremy Mallett's of Susquehanna, recorded live at our New York show. I'm Tracy Alloway. You can follow me at Tracy Alloway.

And I'm Joe Wisenthal. You can follow me at the Stalwart. Follow our producers Carmen Rodriguez at Carmen armand dash O Bennett at Dashbot, Cale Brooks at Calebrooks and Kevin Lozano at Kevin Lloyd Lozano and for more odd Laws content go to Bloomberg dot com slash odd Loads. We have a daily newsletter and all of our episodes, and you can shout about all these topics twenty four to seven in our discord discord dot gee slash And if.

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