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Chapter 1: What are prediction markets and why are they important?
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Chapter 2: How does Susquehanna International Group participate in prediction markets?
Hello and welcome to another episode of the Odd Lots podcast. I'm Jill Wiesenthal.
And I'm Tracy Alloway.
So Tracy, we're still rolling out shows from our live show on May 28th 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.
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Chapter 3: What role do market makers play in prediction markets?
So it's like you have stocks and bonds 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 really 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 halftime show ones, but some of these other ones.
Chapter 4: How can prediction markets be used for hedging economic risks?
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 done 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 Mallitz, 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 Susquehanna 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 providing liquidity in 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.
Chapter 5: What challenges do prediction markets face in attracting institutional investors?
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 sales force 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 birthday to her. But...
It's incredible that you're here. I know.
Chapter 6: How does liquidity impact the success of prediction markets?
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, equity options. But obviously, we trade a lot of instruments across a lot of things. And we have a culture overall that's very much looking for new opportunities and thinking about things in probabilities.
And it all starts from Jeff Yoss, our founder. He loves things like prediction markets. So 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 Bayesian probabilities and trying to think of everything in terms of break it down into what the odds are.
Chapter 7: What are the implications of insider trading in prediction markets?
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, OK, there's some contract out there. Who is going to win the Texas primary election? Let's just say. So there's an exchange, and there's an instrument, and it's either going to end at 100 or 0, 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.
Chapter 8: How does Susquehanna envision the future of prediction markets?
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. But 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 gonna 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 Calshi?
So 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 a constraint for us. 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. 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. 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 warehouse a lot of risk for the street.
Sometimes there's just something where everyone needs to hedge a 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 to 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 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 that's a big part of what our team has striven to build.
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