Bets Are Off: DFV, BUIDL, CFTC
2024-05-17 00:39:07
<p>The audio companion to Bloomberg Opinion’s beloved Money Stuff column hosted by its author Matt Levine, “whose deadpan style mixes technical elucidation and wit” (NY Times). Once a week, Matt and his friend, Bloomberg News reporter and TV host Katie Greifeld, talk about Wall Street, finance and…other stuff. New episodes every Friday.</p>
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I'm Maria Konnikova. And I'm Nate Silver. And our new podcast, Risky Business, is a show about making better decisions. We're both journalists whom we light as poker players. And that's the lens we're going to use to approach this entire show.
We're going to be discussing everything from high-stakes poker to personal questions.
Like whether I should call a plumber or fix my shower myself. And of course, we'll be talking about the election, too. Listen to Risky Business wherever you get your podcasts.
Bloomberg Audio Studios. Podcasts, radio, news.
Anyway, hello and welcome to the Money Stuff podcast.
Your weekly podcast.
OK, we're going to get through this.
Hello and welcome to the Money Stuff podcast, your weekly podcast, where we talk about stuff related to money.
I'm Matt Levine, and I write the Money Stuff column for Bloomberg Opinion.
And I'm Katie Greifeld, a reporter for Bloomberg News and an anchor for Bloomberg Television.
What's going on, Katie?
Great question. We're going to talk about meme stocks and the week that has been. We're going to talk about Biddle. It's a tokenized money market fund, essentially, stablecoin, whatever you want to call it. And then we are going to talk about election contracts and how much the CFTC does not like them.
A certain amount. I feel like I've said that in these signpostings before. Yeah. Certain amount is usually the answer.
So. Meme stocks. Meme stocks. This started on Sunday.
No, it started in 2021.
Right, right. This episode.
Ended in 2021, too.
And started, ended 2021.
. We're dormant for a while. Roaring kitty. He came back, question mark. Did he for real?
Did he come back? His account did.
I just took it for granted that he came back. I'm not so sure anymore.
I also took it for granted that, oh, he, the account posted it. It must be him. There is some speculation that it's not actually Roaring Kitty.
We haven't said who Roaring Kitty is. Can we say who Roaring Kitty is?
Okay. His name is Keith Gill. He's a real man. He had a starring role in the 2021 episode of Meme Stock Mania.
He did tell Congress, I am not a cat, which is like a great move.
It was, it was perfect. He also said, he likes the stock.
He really liked GameStop.
Yeah.
And he made a lot of money really liking GameStop into the early 2021 rally in GameStop, where he made tens of millions of dollars.
I do think his origin story is really interesting, though, because in addition to being Roaring Kitty, he's also known as DF.
Yeah, DF value.
Exactly. Yeah. Like this truly started because he actually did like the stock.
Like he's not, he's become this meme-y character, but he's like a guy who did fundamental research on GameStop and thought it was undervalued and did like multi-hour YouTube tutorials and why GameStop was a good company. Like he's a, he's pretty serious about it.
Exactly. So. he started from, you know, a place of fundamental analysis. He tweeted again on Sunday after not tweeting since June, 2021.. The pace of his tweets have been breathless.
He has been posting so much.
How many of them have been about GameStop?
That's the thing.
Zero, surely.
Yeah. I mean, he did, or the account posted a clip of CNBC talking about GameStop. So that blurs the lines, but you're right. That the thing that kicked it all off on Sunday was just a cartoon man leaning forward in a chair. He didn't mention GameStop, but GameStop skyrocketed.
Yeah. I mean, it's the cartoon. man was represented him and the leaning forward in the chair represented he was coming back to lead the masses to victory and GameStop to the moon. That's how people interpreted it. He is not commented.
We haven't seen his face. He hasn't posted any YouTube videos.
Hasn't posted on Reddit, I believe.
Yeah.
So it's really, really magical that this Twitter account can, you know, it added something like three or $4 billion to the market cap of GameStop on like Monday.
Yeah.
Just like for getting the band back together, like for the lulls, nothing happened. Neither GameStop nor allegedly Roaring Kitty said anything about GameStop. There's no news. There's just like, oh, that guy's back. That'll be fun.
So the question I have for you, and you pose this in one of your columns in the context of if you were designing an exam, could this count as market manipulation, given that he didn't mention GameStop, but what if he had bought a whole bunch of calls on GameStop and then he posted?
When I learned about market manipulation, lo these many years ago, people talked about materiality and, like the reasonable investor. Information was material to the reasonable investor, you know, if it was like peaceful and reasonable investors, investment decisions. And, you know, if you lie about material stuff, that's fraud. Materiality is the sort of standard for all of the securities law stuff. And one thing that has happened in recent years is you're like, what does a reasonable investor have to do with anything, right?
Because if you had gone back to me in law school and said, is it material to the price of GameStop stock that a guy tweeted a picture of a guy leaning forward in a chair, I would have said, no, that has nothing to do with the reasonable investor or anything else. or GameStop. Like. he's never mentioned, you know, I didn't mention GameStop in the tweet. So he couldn't possibly have been like tricking anyone about anything material.
So it seems hard to argue that there's any sort of market manipulation. Even if, by the way, like, even if he was like doing it as nefariously as possible, even if you like, bought a bunch of call options and like, tweeted the thing and sold the call option, if you'd bought call options and tweeted like GameStop discovered the cure for cancer and then sold those call options, like. that's obviously market manipulation. But like if you just replace tweeting something about GameStop with tweeting a picture of him leaning forward in the chair, which has way more of an effect, I think it becomes not anything that the SEC can do anything about, because he's not saying anything. He's not lying.
He's not misrepresenting anything. He's just, you know, tweeting a picture of a guy in a chair. Now, I will say there's an amazing case about Bed Bath & Beyond where, like Ryan Cohen, the actually GameStop CEO now, was also dabbling in that stock. And he tweeted, I can't even reply to someone. He tweeted like a moon emoji or a rocket moon emoji, which doesn't even look, it looks like a smiley face, but it's allegedly a moon emoji.
And someone sued saying that was a fraud. And a judge wrote a long opinion being like, well, the moon emoji represents his views and the fundamentals of, and basically decided the Fox switch could go forward. So, like there is some ambiguity here. But I do think that even if he was like trading on these tweets, he's still clean. Now, the really interesting question is, you know, as you say, no one seems really sure that he's back.
If you hacked his Twitter and stole his account, or if you bought his Twitter from him, and you were just tweeting these things, which have nothing to do with GameStop, but which have caused the price of GameStop to go up by billions of dollars,
is that market manipulation? If you're trading on that, and again, you're not saying anything about GameStop, so it's really hard to argue that it is, but it also feels like it is. Yeah.
Yeah. And what if he just sold his account?
Well, I mean, if he just sold his account, he's out of it. But whoever's using the account is like, if he sold his account to anyone other than someone planning to manipulate the price of GameStop, he got a bad deal, right? Because that's a valuable account. Yeah. And Twitter, or an ex, Patrick McKenzie, tweeted, you shouldn't be able to increase the market capitalization of a company by billions of dollars by pointedly not mentioning it in a tweet, but at least two people can.
One is nearly the richest person on earth, and the other's labor is deeply mispriced, right? So one is like Elon Musk, when he tweets about something, you know, he famously tweeted, use Signal about the encrypted messaging app, and, like, the price of this unrelated company called Signal went up. So when he like, doesn't tweet about companies, he can still cause their price to go up. He's made some use of that skill and also happens to be extremely wealthy. But then Keith Gill has done pretty well for himself.
Keith Gill's labor is not that underpriced. He's made a lot of money buying GameStop.
But even still, if you or I were suddenly to become Keith Gill, how do you capitalize on this power in a legal way?
I don't want to give legal advice. More to the point, if I, just like, acquired Keith Gill's Twitter account, I think I would have tweeted exactly what was tweeted here. I don't know what people were trading, but what I would have done is I would have bought a lot of call options on GameStop. I would have tweeted something like, I'm back.
There you go.
No reference to GameStop. And then I would have sold all the call options.
Yeah.
And then you get diminishing returns.
But I think we're there.
Yeah, well, I think you're probably right. But if you do this once, you got to do it for a lot of money and you got to do it as levered as possible, like call options.
I'm just piecing together the price action with how often he has been tweeting. On May 15th, he tweeted at least 20 times.
Sorry. You get diminishing returns of going away and coming back. Oh, right. Since his first tweet from his Sunday comeback, like, ah, you get nothing after that. Unless you start tweeting about GameStop, which seems riskier.
No one has really succinctly defined to me what him being back means. Well, you've seen it.
Tweets are coming from his account about movies, like movie clips are being tweeted from his account.
Yeah, but he hasn't posted anything substantial.
Oh, no.
Why does it matter that he's back? Why does it matter that he's tweeting? I'm asking almost about-.
These are like the deepest questions of financial markets.
Yeah, apparently.
Why does it matter that Keith Gill is tweeting movie clips? Maybe it doesn't. Maybe we're wasting our time here. But, like, you know, I mean, it caused the price of GameStop to go up by three or four billion dollars. And like, why?
Because GameStop was like the quintessential meme stock. And what a meme stock is like something whose trading action is entertaining and gives people a sense of community. And it's like fun to be a part of this online message board community where you like trade jokes and share memes and then also buy call options on GameStop, right? That died down for a number of reasons. One of which is that the price of GameStop, after going up a lot in 2021, came down.
But there are other ones, like the pandemic ended. And so people who are like shut at home got to go out, or, you know, entertainment moves on, right? And people like found other things that were fun. And so the community fun meme sensibility that grew around GameStop ended. And when he comes back by tweeting memes, like, there's nothing to do with the fundamentals of GameStop business, but it's, oh, great.
This fun thing is back. Like our online friends are back. Like we can go have fun together online. And when they go, have fun together online, one thing that means is buy call options on GameStop. And so the price goes up.
Yeah, I think I'm searching too hard here. Oh, yeah. I just, I have this instinct.
None of it makes sense. But it sort of does, right? I mean, like it is a fun thing to do online. And like part of the fun is like you do trade the stock. And so like the entertainment franchise is back, like we're on season two of GameStop.
And so that does make sense on its own terms. It just doesn't make sense in like financial terms.
The thing that I do find fun and that I do find interesting is that when what you're describing, this sense of community, we're in it for the lulls, when it actually does translate into the fundamentals of the business. And I'm talking about AMC and what AMC did this week.
Yeah, this has kind of always been how it's worked, like going back to 2021.
. GameStop has always been like, we don't understand what being a meme stock is. And you know, like they are a meme stock. They're run by a meme stock guy. And like they like the memes, but they don't do anything corporate finance-y with it.
Whereas AMC, at every moment when their price has rallied irrationally, they've been like, we are selling stock. We are raising money. We are going to get through like our tough financial times by selling stock to people at the best possible time. And so AMC actually didn't quite hit the best possible time.
They got really lucky though.
So they were selling stock for the last six weeks. Yeah. And so they almost entirely missed this rally. They got some of it, but like they ended their stock sale plan basically on that first day when AMC rallied in sympathy with GameStop and everything else and all the other meme stocks. But then they did turn around like the next day and sell a bunch of stock, not in the open market, but they like exchanged a bunch of their debt for stock.
Yeah.
So, basically, AMC has always, this has always been AMC's strategy. They're like a very indebted, somewhat struggling movie theater chain. And every time their stock rallies, they're like, we're gonna get rid of some of our debt by like exchanging it for this, like incredibly overvalued stock.
Yeah. In terms of why they always seek to capitalize, and maybe GameStop doesn't, if you take a look at the debt profiles, AMC still has four and a half billion dollars in debt. Right.
One answer is they need to, but I do also think there's like a personality issue where AMC, like their CEO, Adam Aron, is like, I'm going to lean into being the leader of the apes as they call themselves. And as he calls them, like the retail meme traders who love AMC. Like he's all in on being an online personality.
It is wild to me that in the year of our Lord 2024, like I get AMC, ape or some variation of that, trending on X for me all the time. And I made the mistake of tweeting that I fell asleep during Dune II. I went to like a midnight showing and I shouldn't have, and I fell asleep and I tweeted that and I thought it was pretty innocent. And my mentions and my inbox were destroyed from people who just love AMC and are in the cult of AMC.
So they're not like, Dune II was a great movie and were offended by you not liking it. They're like, movie theaters are great and were offended by you sleeping in one?
Exactly. Yeah. Because it was like exclusive to AMC or something that I didn't realize before I sent it. They weren't upset that I didn't like the content of the movie.
It was a great movie. You were like secretly in the pay of AMC short sellers.
That's exactly what they thought. Let me clear the record. right now. I am not. But anyway, GameStop, I thought this was interesting.
It has long-term debt of $17.
7 million and it remains limited to a low interest, unsecured term loan associated with the French government's response to COVID-19.
Oh, yeah. Yeah. That's good debt. AMC's debt was like, I forget exactly what it's called, but it's 10 slash, 12%, pick, toggle, second, lean, subordinate. It's all the words that you were like, oh, that's bad debt.
Yeah. My heart started racing. Pick, toggle, yeah. That's a lot of words. Yeah.
Did get a little bit into the fundamentals. I would also add that the movie business is really tough right now to be a movie theater chain.
You haven't keep Katie Graff all the week.
No, no. And you think about the lagged effects of the writers and actor strike. There was some forecast out there that there won't be a single summer blockbuster to break a billion dollars, which is pretty terrible. And then you take a look at GameStop, and it's trading at more than 1,200 times it's expected 12 month forward earnings. So a lot of movement on the charts and a lot of silly valuations right now.
Right, right. If any of this were being discussed on Keith Gill's Twitter account, things would be different.
It would be different.
The summer blockbuster, the summer entertainment is Keith Gill's Twitter account.
I'm just searching. I'm searching too hard for meaning, but I need something to ground me in this life. Are you done talking about this?
No, I'm going to talk about this more on the Bloomberg Big Take podcast about meme stocks.
Sounds like a riot.
It's something.
You can listen to it on Apple podcasts, Spotify or wherever you get your podcasts.
This podcast is supported by Apollo Global Management. When it comes to building and financing stronger businesses, Apollo turns some of the world's most complex challenges into growth opportunities. Apollo's customized capital solutions help drive innovation and growth, turning the great businesses of today into leaders of tomorrow. As one of the world's largest alternative asset managers, Apollo is helping to fuel the real economy by generating investment grade credit, helping to fill gaps in America's financial ecosystem, and providing greater access to more resilient and diverse pools of capital. By providing companies with access to flexible financing solutions and partnering with management teams to help grow their businesses, Apollo is there every step of the way to drive positive outcomes for companies and power economic growth.
Apollo, investing in tomorrow today. Learn more at Apollo.com slash private investment grade.
I'm Maria Konnikova. And I'm Nate Silver. And our new podcast, Risky Business, is a show about making better decisions. We're both journalists whom we light as poker players, and that's the lens we're going to use to approach this entire show.
We're going to be discussing everything from high stakes poker to personal questions.
Like whether I should call a plumber or fix my shower myself. And of course, we'll be talking about the election too. Listen to Risky Business wherever you get your podcasts.
Wait, are there lots of sirens in this podcast?
What is going on? Should I call my mom? Should we go to section two? I think I would feel a lot better, a lot grounded, more in touch with reality, if we started talking about the blockchain and tokenized whatever this is.
Meme. stocks are so 2021 and now they're back. I feel like I tried to walk away from the blockchain a little bit in recent months, but now I'm like really back.
You're really back. Are you saying that officially, you are really back?
Like Keith Gill? No, I would say that like I happened to write a lot about crypto this week.
Yeah.
There's that. There is that. I'm not like looking forward to doing it again next week. But you did talk... I was hoping not to.
You wrote about it in a very sedate, grown-up way, because you wrote about BlackRock involved in crypto.
The sedate grown-ups of crypto.
Yes.
Is that true? I always wonder like if you walk into the BlackRock crypto floor, is everyone like wearing shorts and...
I somehow doubt that.
Yeah, it's still pretty BlackRock.
I don't think you're seeing any knees there. No shins. I think they're all wearing pants. But let's talk about BIDDLE.
BIDDLE.
Take it away.
That's spelled like build, but wrong. Like B-U-I-D-D-L-E.
Like HODL.
Like HODL, right. HODL, which is crypto for hold. Crypto for build. But it actually stands for something, right? It's an acronym.
I don't know what it is. It is the BlackRock USD Institutional Digital Liquidity Fund. Yeah, BIDDLE.
I have to say.
. I love, like crypto does, a lot of fun stuff with names, but like traditional finance, you know, I grew up on a derivative structuring desk and that job is 40%, coming up with acronyms for things. And so like, I respect that BlackRock is like, we're going to just very casually slip this acronym name into it.
Yeah, I grew up in New Jersey. So a little bit different.
You can come at it from TradFi. You can come at it from like crypto. The traditional answer is like, this is a money market mutual fund. It's a short-term treasury bill liquidity fund. So it's just the money market fund.
But you can trade it on the blockchain, right? It's on the Ethereum blockchain. And you can send your units of BIDDLE from your Ethereum wallet to someone else's. And so you can use it on the blockchain for crypto trades. If you're doing a crypto derivatives trade and you need collateral, you can post BIDDLE as collateral.
Or you can use it as money and pay people with BIDDLE, I guess. If you come at it from the other way, from like crypto, it's a stable coin, right? It's like a thing that is worth a dollar, that is, you know, stably worth a dollar, that is underpinned by, like short-term money, good U.S. dollar debt obligations. And that goes on the blockchain.
So it's a stable coin that is in competition with the Circle USDC coin or Tether. But unlike those, it pays interest just natively.
In a world where Fed funds is like 5%, that's pretty attractive. Right.
Crypto is in many ways a low interest rate phenomenon, right? Because it's like, oh, all these projects that have no cash flows, but like weird, grandiose promises, that's a better pitch in a world of low discount rates. But, like stable coins in particular, are a low interest rate phenomenon because when Tether was like, we'll take your money and do something weird with it, but we'll give you back the dollar whenever you ask for it, that's a better trade. if, like, you can't get 5% interest on your dollar elsewhere. But now you can get 5% on your dollar elsewhere.
Tether is not a particularly attractive, pure investment opportunity. Now, there are ways to use Tether in crypto to make money, but the proposition at Tether is like you give them your dollar and they invest it in probably a treasury or something.
And that's what they would say.
That's what they say. And then they earn 5% interest and they keep it and they don't give it to you. Whereas, like Biddle is like, kind of the same thing, but we will give you the interest.
So thinking about it in the framing of who is this for? and it's for people in crypto helped me understand this a lot more, because when you're talking about it as a money market fund, that's on the blockchain and tokenized, my first reaction is that is a long walk for a short drink of water. But then you think about it from the perspective of this is for crypto people. It's not necessarily like a gateway to bring institutional suppliers into crypto. It's for people who are already in crypto, who actually want to earn interest on basically their cash management.
It makes a lot more sense.
I think that the fact that BlackRock has a crypto division is a bet on some notions of crypto will become more accepted in broader institutional finance, right? Yeah. And so one thing that means is that if traditional institutions are going to get more into crypto, stable coins are kind of like an important part of crypto trading, of collateralizing trades, of payment for trades. And at some level, institutions are going to say, I'm not going to keep my money in a stable coin, that is one, possibly issued by someone who's in more regulatory hot water than BlackRock, and two, that doesn't pay interest, right? And so BlackRock is like, well, you have this alternative product where you can get paid interest and you can have your money with BlackRock.
And like not just BlackRock, but a BlackRock money market fund, which is like a thing that people understand, right? Like it's easy to understand what a money market fund is, because it's like it exists and it's like well-known technology. And so if you're a sort of long-term bet, as, like more traditional institutions are going to get into crypto, then like having this traditionally appealing product helps with your offering in crypto. But yeah, I also think, right, it's like you're a crypto trader and like you need to hold stable coins and like. we'll give you interest, right?
I mean, maybe that is BlackRock's long-term vision. I'm thinking about the position of the Securitize CEO. BlackRock, of course, partnered with Securitize for this thing. His name is Carlos Domingo and his perspective on who this is for. is that this particular product, so specifically this one, it's geared towards crypto institutions that want to have a cash management product for treasury management on the blockchain.
So it's more for the crypto nations. Yeah, right.
If you're a traditional institution, you don't need to be on a blockchain.
Exactly. You would just buy a money market fund.
I will say, though, the Financial Times article about this mentions T plus one settlement.
Yeah, this is where it lost me.
It loses me as well, but I'm going to put it out there. This is more of a 2017 thing, but, like people used to think that having a blockchain would somehow speed up trading and settlement in financial markets, that, like right now, things exist on computers and in databases that are too slow. And if you put them on the blockchain, they'll be faster and you can settle trades instantly rather than having to wait for T plus one or T plus two settlement. And so the idea here, supposedly, this is not decided to BlackRock or Securitize, this is just an idea that is floating out there, is that tokenizing things like cash management will allow for faster settlement of transactions. And ultimately, the traditional finance system will move to a blockchain-based system, and you'll need this for that to work.
Now, in 2017, people really did go around saying the traditional finance system will move to a blockchain-based system. In 2024, that's like a little embarrassing to say.
I mean, Larry Fink, is still into it.
Well, then there you go. Larry Fink is the CEO of BlackRock.
You know, still in 2024 expressing support.
For a long time, there's been a competitive tension between money market funds and checking accounts. Yeah. Bank accounts, right? Yes. Because money market funds have advertised themselves as like, we are, a place that pays you high interest rates and you can use it as cash, you can use it.
as for checking. And, you know, money market funds are interested in being a cash substitute for companies and individuals and institutions. And if you think the future of payments or the future of security settlement is on the blockchain, who controls cash on the blockchain? Well, the answer is like, you know, Tether, right? The answer is like the big stablecoin issuers.
But like, arguably, if BlackRock can build a better product for offering cash on the blockchain, then not only does that mean that they're, you know, they have a good crypto product, or like they're offering a good product to people who are currently in crypto, but it's like, if you think the future involves the blockchain, then this product can insert you into the heart of the payments infrastructure. So I think that's all far-fetched, but I think it's an interesting bet.
Well, I mean, I feel like that's the future that the SEC would, certainly, that it's BlackRock.
Oh, yeah, absolutely. I don't think the SEC is going around hoping for a blockchain-based crypto future of payments. But like, if they're going to have a crypto-based future of payments, I think they would prefer that it be BlackRock than Tether, right?
Four-dimensional chess by BlackRock.
This podcast is supported by Apollo Global Management. When it comes to building and financing stronger businesses, Apollo turns some of the world's most complex challenges into growth opportunities. Apollo's customized capital solutions help drive innovation and growth, turning the great businesses of today into leaders of tomorrow. As one of the world's largest alternative asset managers, Apollo is helping to fuel the real economy by generating investment-grade credit, helping to fill gaps in America's financial ecosystem, and providing greater access to more resilient and diverse pools of capital. By providing companies with access to flexible financing solutions and partnering with management teams to help grow their businesses, Apollo is there every step of the way to drive positive outcomes for companies and power economic growth.
Apollo. Investing in tomorrow, today. Learn more at Apollo.com slash private investment grade.
I'm Maria Konnikova. And I'm Nate Silver. And our new podcast, Risky Business, is a show about making better decisions. We're both journalists whom we light as poker players, and that's the lens we're going to use to approach this entire show.
We're going to be discussing everything from high-stakes poker to personal questions.
Like whether I should call a plumber or fix my shower myself. And, of course, we'll be talking about the election, too. Listen to Risky Business wherever you get your podcasts.
Are you ready?
Oh, I'm ready.
Time to bring it home. It's our third act, and we're going to talk about events contracts.
Oh, yeah.
Yeah. Elections. Let the people trade. Let them trade. Events contracts.
You have places like Kelshi. You have Predicted. They're pretty popular.
They're very popular. Yeah. Despite being like, people want to know who's going to win the election, right? And, like, the sort of standard model of looking at polls feels unreliable and somewhat outdated. And the prediction market feels like it should tell you the answer.
It should be like, oh, the smart money thinks that the odds of, you know,
Trump winning.
You can say it. How can I?
Or whatever, 55% or whatever. And so, therefore, that's like the correct odds, right? There's like the Nate Silver model of translating polling results into probabilities. But there's like the simple model of, like, markets providing the probabilities. And, like, people like that.
But, like, those markets are thin, in part because they're illegal, right? The U.S. Commodity Futures Trading Commission has never really been a fan of election prediction markets. You know, the way it works is. you need to list the prediction event contract.
You go to the CFTC and ask for permission. And if it's an election contract, they just say no. And so, CalShare has been told no. And other exchanges like that have been told no. And last week, the CFTC proposed a rule that would just say, it's always no, right?
Like, instead of asking us, we'll just categorically exclude certain kinds of event contracts. Yeah. And the kinds are, for the most part, sports, the Oscars, and elections. Those all count as gambling. And so, they're not allowed to be listed on U.S.
commodities exchanges.
Yes, CFTC commissioners voted 3-2 to release the proposed regulation for public review agencies. Three Democratic commissioners voted in favor. You had two Republicans dissenting. I don't know. So, I, as a journalist, like prediction markets just because it's nice to see what people are thinking.
As a consumer, I really want there to be a deep, liquid prediction market that could tell me what election odds are.
Well, we were on the way there because did you see the news from April that Susquehanna is starting a trading desk focused on events contracts in partnership with CalShare? They plan to act as a market maker for transactions with CalShare, which is obviously trying to expand. Obviously, they weren't able to do elections and gaming. I think the reasons for why the CFTC doesn't want to do this are interesting. Tell me, I forget his name, but the election cop guy.
The election cop guy. Yeah, that's Ross Dunn-Benham, who's the chair of the CFTC. He gave a really interesting statement when proposing these rules, saying basically he doesn't want the CFTC to be election cops. So, the way it works is that the CFTC mostly regulates commodities futures markets. And so, if you spoof and putting in orders for wheat futures, then you get in trouble with the CFTC.
But also, they regulate the underlying commodities to make sure the futures markets are fair. So, if you go burn a cornfield, you'll get in trouble with the CFTC, probably other people too, because you've manipulated the market for corn futures. The theory here is that if there are election futures, the CFTC will regulate them. And if you then throw away a bunch of ballots or whatever, then the CFTC will have to come in and decide whether you've committed election fraud. that affects a CFTC-regulated contract.
And the CFTC is like, we don't want that responsibility.
I mean, maybe I'm being naive, but it just seems unlikely that would ever be their responsibility. I get that they have to regulate the underlying market, but even still...
I hear you. But one thing that I've been writing about for a long time is that the SEC, the securities regulator, has a surprising amount of responsibility for regulating all sorts of stuff. that doesn't sound like securities law because of how it affects the securities of public companies. And so, the SEC is very interested in greenhouse gas emissions, regulating how companies account for and disclose and also do their carbon emissions, because the SEC says, well, yeah, that's relevant to investors. And so, all this environmental stuff gets wrapped up into stock prices, and so we regulate it.
The SEC has rules about conflict diamonds. They did an enforcement action against SeaWorld for its mistreatment of killer whales. All this stuff where, if it affects securities markets, the SEC is like, oh, we'll put our hand in that. We'll be interested in that. And I write about this a lot.
I say everything is securities fraud, right? It's some combination of. the SEC is interested in expanding its power as much as possible, and so they're like, ooh, we'll be an environmental regulator. But it's also like US politics are not necessarily good at writing substantive regulations. And so, people are like, I want to fix this problem, and the way I'm going to fix it is by suing for securities fraud.
It's a thing that courts and the SEC are just more responsive to than to a lot of other complaints. You get a sympathetic hearing in court. And so, all of this stuff in the world gets smuggled into securities law, and the CFTC is looking at that and saying, if elections get smuggled into commodities futures law, that's going to be really controversial. We're going to get in trouble for trying to regulate that, so I think they want to stay away from it. And I agree with you that it sounds far-fetched to everyone, except me, because it's a thing I've been thinking about for decades, and I'm like, oh, yeah, I see where you're coming from, CFTC.
So, I mean, maybe in a decade, I'll be there as well. By the same token... If we do this podcast for that long. We'll revisit this before what?
The episode.
The 2034.
. Yeah. 500, maybe. By the same token, you think about some of the proponents, of course, betting on... Or, sorry, prediction markets.
You can say betting on, it's okay.
You think about some of the proponents for these political events contracts. They argue that they could be a valuable source of data for forecasting election outcomes. This is from the Wall Street Journal. Kind of agree with that as a journalist. This is true.
But then that they would also allow companies to hedge risk associated with either Democrats or Republicans coming to power. I don't super know what that means. Yeah, I don't really believe that.
I think that people are pretty bad about predicting the directional impact of elections on, like, financial quantities. So, if you're like, oh, the price of oil will go up if a Democrat is elected, so I have to hedge that. Like, you, should just buy oil futures.
Yeah, come on.
You shouldn't, like.
. If you think, oh, it'll be bad for my business in some unspecified way if a Democrat is elected, that's probably wrong. And, like, you, should probably think about how it will be bad for your business and hedge in, like, those financial markets rather than hedge by, like, betting on Democrats winning an election.
On Cal-She.
On Cal-She.
Yeah. That's pretty funny.
To the extent you're hedging, you are, I think, undermining the predictive impact, right? Yeah. It's like. you're not, like, betting. You're like, I don't know who's going to win, but if they win, it's bad for me, so I'm going to buy...
Well, that's something I think about a lot with these prediction markets. I don't know much about betting. I'm not a better. But the way I understand it, if, like, there's super long odds on something and I wanted to bet on something outlandish but that has a high potential payout, I would take that bet, and that's not necessarily what I think is going to happen.
You're implicitly saying.
. I think the probability of that happening is higher than the probability reflected in the market. That's true. Implicitly. Like, you're not really...
Probably a lot of people are taking 1% bets, not because they think the odds are 2%, but because, you know, it's like a lottery ticket.
Yeah, I hear what you're saying.
But not in, like, two-party elections.
Yeah, true, but it's not like a survey where I'm 100% always going to say what I think is going to happen. I'm betting, and there's some strategy to that.
Yeah, but the counterpoint is, like, surveys, you can say whatever you want, it doesn't affect you, right? There's real money on the line in betting. And, you know, if you had a big liquid prediction market for elections, that would incentivize.
big, smart financial institutions to invest time and resources into figuring out who's going to win, so they could bet on the winning side, and then they would probably be accurate.
And they could hedge themselves.
They could hedge themselves, sure.
I don't know.
I think that's something.
I am curious to see how this actually turns out. So they're opening it to public review. I mean, there's a chance that nothing changes before the election itself.
Big chance, right? And then, like, after that, you know, like, all bets are up. I will say that one of the Republicans who dissented was like, there's a weird thing here where there's, like, two ways to bet on sports. There's, like, event contracts, regulated by the CFTC. And then there's, like, regular sports gambling, which is regulated by the states.
And it used to be that the way it worked is that gambling was kind of illegal almost everywhere. And so, like, the CFTC was like, you can't have betting on sports on CFTC exchanges. And everyone's like, oh, of course. And all the states were like, you can't have betting on sports here. And everyone's like, okay, fine, we'll do it illegally.
Most states now have, like, legalized sports gambling. And so there's a lot of sports gambling. Oh, yeah. It's very easy to gamble on sports. It's very easy to gamble on sports on your computer, right?
Also, there are these people who are like, we're going to run a national futures exchange where we'll have events contracts. And the CFTC is like, no, you can't do that. There's, like, a really kind of, like, fuzzy distinction between, like, what is a futures exchange that allows events contracts and is regulated by the CFTC and what is a sports book that is on the internet and that allows sports betting, right? One of the commissioners who dissented was like, we are stepping on state jurisdiction by saying, you know, you can't have sports gambling. And I actually don't know how it works.
I'm very puzzled if any sports book is going to get in trouble with the CFTC saying, actually, you're running a futures exchange with events contracting. You're not allowed to do that.
We've talked about sports. We've talked about the election. Are we going to talk about the Oscars or...
Oh, yeah, the Oscars. The CFTC, like, doesn't want to promote gambling. And so they're like, you can't bet on the Oscars. Why the heck not? But, right, why the heck not?
It seems fun.
It does seem fun.
And I wrote this, but, like, the CFTC, doesn't want to be an election cop. And I think that is wise of them. But, yeah, it'd be fun to be, like, the Oscars cop, right? The CFTC auditor in the room.
Also, I'm sure it's rigged already. So...
They'd find it. They'd get to investigate.
If we could get the CFTC in there to finally figure this out.
Like, wouldn't.
. If you were a CFTC enforcement lawyer, wouldn't you want to be the one cracking whether the Oscars are rigged?
I would be salivating.
There was a case this week about someone running a cattle Ponzi scheme. You know, that's also good, right? But, like...
How unearthed is that? Do the cattles not exist? Yes. Oh, I figured it out.
And that was the Money Stuff Podcast. I'm Matt Levine.
And I'm Katie Greifeld.
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I'm Maria Konnikova. And I'm Nate Silver. And our new podcast, Risky Business, is a show about making better decisions. We're both journalists whom we light as poker players. And that's the lens we're going to use to approach this entire show.
We're going to be discussing everything from high stakes poker to personal questions.
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