Transcript: Luana Lopes Lara
The transcript from this week’s, MiB: Luana Lopes Lara, Kalshi, is below.
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RITHOLTZ: This week on the podcast, I have an extra special guest, Luana Lopes Lara is a co-founder of Kalshi. They are a derivatives trading marketplace, where you can go and trade event contracts on such disparate occurrences such as COVID-19, economic outcomes, interest rates, Federal Reserve, politics, climate and weather, culture, the Oscars, the Grammys, science and technology, all sorts of really fascinating places.
They are the only such marketplace that has been approved for the sort of events trading by the Commodity Futures Trading Commission, the CFTC, which makes them both fascinating and — and unique. There’s nothing else like them. This provides a way for individuals and institutions to hedge all sorts of really interesting events. And as opposed to having think about, well, if this happens, what’s the ramification in gold, or oil, or inflation, or interest rates, you can actually bet on that exact event and hedge your business or your portfolio. It’s really quite fascinating. I thought this was really interesting conversation, and I think you will also.
So with no further ado, my conversation with Kalshi Co-Founder, Luana Lopes Lara.
ANNOUNCER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
RITHOLTZ: My special guest this week is Luana Lopes Lara. She is the co-founder of Kalshi, one of the only derivative trading marketplaces that allows the trading of event contracts in order to hedge against major business and political events. Kalshi is the only marketplace to receive approval from the Commodity Futures Trading Commission, who regulates the trillion-dollar derivatives industry.
Luana Lopes Lara, welcome to Bloomberg.
LARA: Thank you so much. I’m very happy to be here.
RITHOLTZ: So — so let’s start just with that unusual intro, you’re the only CFTC-approved way to trade on the outcome of events. Explain that a little bit.
LARA: Right, exactly. Kalshi is a financial exchange that allows people to trade on the outcome of a lot of different events. So things from, will inflation keep going as high as it is right now, will the Fed raise rates to like, well, 2020 with the hottest year on record? And what really sets us apart is that we’re the only — the first and only ones regulated by the CFTC to do this in the United States.
RITHOLTZ: So — so let’s talk about that because I love the story about you guys. You and your co-founder, you start calling attorneys, and one day, you end up calling like 60 or 70 lawyers in a single day. And pretty much every one of them said, “People have been trying to do this since the 1980s. It’s never been approved. Just forget about it, it’s not happening.” Tell us about that.
LARA: Right. So we really wanted to build Kalshi the right way. So to view the exchange that is sustainable and — and can be a pillar of the financial world, we wanted to make this really big, get the right partners on board, and really try to build something that’s going to outlast CME. You know, like, CME is around there for like 150 years.
RITHOLTZ: Right.
LARA: And the way to do that, for us, was to build a proper financial exchange, to build this right. And we knew that getting regulated was the first step and like figuring out how to do it right. But obviously, me and my co-founder were both computer scientists, we knew nothing about regulation. So we sat down and put on a spreadsheet the names and — and emails of – of 65 different lawyers that we thought maybe could be related to this, and we called one by one. I think we split who was going to call who. And all of them were just like, “That’s not going to happen. The CFTC won’t allow this. It has already — they already said no to this in the past.”
But because of a friend of a friend of a friend, we ended up getting to Jeff Bandman, who works with us till today. He’s an ex-official of the CFTC, and he really understood the Commission and – and helped us — started — helping us start navigating the entire situation. And yeah, it was two years of — of — of that entire engagement and iteration of the CFTC with all their core principles and concerns that they had, to address them and — and really ended up getting regulated in November 2020.
RITHOLTZ: So it sounds like it wasn’t so much that the CFTC was against the idea of event contracts in order to hedge on these circumstances. They just didn’t like what was presented them previously, over the previous 40 years, or — or did something change that they suddenly said, “Oh, we used to think this was a bad idea. Now, we think it’s a good idea.”
LARA: I think it was — it’s more of the first. I think it was about presenting to them why we thought event contracts were so important, and how they could really be used for hedging. And every day hedging like — like retail, and Americans every day can hedge things like inflation, like rates, risks that we see and read about like in the news or on TV every day.
And it was really like presenting to them and getting them to comfort with how these markets work, how they weren’t easy to manipulate, how the rules could — could operate. So really getting them to comfort with how the exchange, the markets, and all of our contracts could — could operate, and that’s what took that long. It wasn’t — in my opinion, it was more like explaining what we wanted to do. They were fantastic from the beginning to really listening and working with us. It wasn’t that they were just like, “No, we’re never going to do this.”
RITHOLTZ: I — I think it’s interesting that it took people from outside of the world of finance to bring an idea into finance from a technology perspective and say, “Whatever the logistical hurdles we have to meet in order to receive regulatory approval,” that wasn’t like an ideological problem. To you, it was a, “Well, this is a logistical problem that we have to solve. And once we solve it, we can get this going.” So how long did the back and forth with the CFTC take to get approval?
LARA: Yeah. No, it was two years or two years and a half.
RITHOLTZ: Wow.
LARA: And yeah, we used to say it’s like we were climbing a very high mountain, and then as we started climbing more, we would see it’s actually twice as high and it would keep – and it would keep multiplying. Because the thing is we would go to them and — and they would have concerns and issues, so we would go back and solve the issues. A lot of it, as you mentioned, was related to technology. We did analysis on similar markets on what we could do, and viewed the surveillance systems and all of those things, and going back to them, and then they were like, “Okay, that’s fine.”
But we have all these other issues now, and then we would go back and — and figure them out and — and — and do that one by one. It was like walking in the desert a little bit. We didn’t know where — where the end was. But it ended up working out.
RITHOLTZ: So — so let’s talk a little bit about your platform. This is unlike futures and it’s unlike derivatives, and that when you are purchasing a contract, you are putting up the full dollar amount. It’s not like where you’re putting up 10 cents on the dollar, or one cent on the dollar. If you’re making a $1,000 bet, you are posting a $1,000. How much did that factor influenced the CFTC that this wasn’t just going to be reckless speculation and — and people fooling around, this was really hedging?
LARA: Right. So we are fully cash collateralized. So every — as you said, every dollar that you can lose or every dollar that you — you trade, you have to have it with us before. And I think this really helps with the safety of the platform and it really started from us. We really want to start in a way that is very safe for everyone, and we can really understand the system before going like too far ahead. And we really see this as very important. So all the funds are fully cash collateralized.
But obviously from — from the CFTC perspective, it adds to their comfort to the fact that there can’t be like leverage or margin or more risk added to the system, that all the money is collateralized, and the retail is protected because of that.
RITHOLTZ: So equities, you can put up half the – the dollar amount, 2 to 1, futures or something like 10 to 1. Options, if you go out of — out of the money and far enough into the future, it’s — it’s a 100 to 1. Is there ever a plan to move away from the 1 to 1, dollar for dollar, maybe not option 100 to 1? But certainly, margin and equity market seems to be pretty reasonable at 2 to 1.
LARA: At the moment, we’re really focused on retail and fully cash collateralization — fully cash — being fully cash collateralized. But at — in the future, I think our goal is to be like the New York Stock Exchange for events. So having — being really the — the central place of the ecosystem, and having like different brokers and institutions, hedge funds, market makers plugged into us, the exchange. At that point, it would make sense to start considering something like that. But right now, we’re completely focused on retail and having it fully cash collateralized as well.
RITHOLTZ: Right. So once — once it becomes a big institutional exchange, then — then you can explore that.
LARA: Right.
RITHOLTZ: So since it’s retail, let’s talk a little bit about retail. Gamification is a real big issue. We’ve seen Robinhood do this. We’ve seen a number of other sports gambling platforms doing this. What are your thoughts about gamification when it comes to events trading?
LARA: Yeah. I think the gamification question is a very interesting one, because I think it’s less about the asset class and more about the actual platform and the mechanics. So for example, you can trade equities on Robinhood, or Charles Schwab. The conversation about gamification is a lot more on Robinhood than on Charles Schwab, even though the underlying like is the same, you’re trading equities.
So we really believe event contracts are — have a very big economic purpose and can be used for hedging and all of those things that we — we talked about. And the gamification would come only in the platform. But we’re very, very focused on building a platform that’s safe, easy to understand and to use, but not — not gamified.
RITHOLTZ: So let’s go over some of the type of events that you guys trade. You could — you can make bets on COVID-19 and vaccination, on economics, inflation, mortgage rates, politics, climate and weather, world culture, science and technology. Let — let’s — let’s take some examples from this. I’d love the idea, will the 30-year fixed rate mortgage be above 3.9% on April 15? In other words, if I’m buying a house and closing on it, and concerned that rates might rise, I could take a trade against that and hedge that position. And I don’t have to be a billion-dollar hedge funds. I could just be someone buying a house.
LARA: Exactly. I think all of our contracts have economics purpose, and they can really be used for hedging. For example, all of our COVID markets, during the Omicron wave, you could really see like even before the news started reporting it, the amount that it was taking up of. And then we’ve talked to the users, and they are, “Oh, wow, like I — I might not be able to go back to school. I want to hedge like that — that situation and all of that.”
So a lot of the contracts I’m very interested in, for example, is the half point rate hike for — for March. I think it’s — it’s a market that went up a lot during, I think, one of the — there was some news that that it was going to go up …
RITHOLTZ: Right.
LARA: … by that. And then it went down again. And — and other ones are GDP and inflation, really just getting into the economic situation we have nowadays.
RITHOLTZ: Number of Americans — so these are all “yes or no” contracts that — that’s …
LARA: Right.
RITHOLTZ: … pretty clearly determined. It’s black and white. Will 254 million Americans be vaccinated by May 1st? But I saw a contract, will America achieve herd immunity by September 1st? Who is the determiner of whether or not herd immunity — how do you define those terms?
LARA: Yeah, that’s a great question. All of our markets are like legal binding documents. So they’re like 40 pages determining what the real rules are, to really make sure that there’s no room for indeterminacy or anything of the sort. So this market, specifically, I’m not exactly sure. I think it’s definitely the CDC or some number around there. But if you – like, all of our rules, if you go to our rulebook, it has very specifically defining where — which number we’re using, how we’re using, which target, if it has to be above or below a certain number, and it ends up being very determined. But for COVID markets, we’re using CDC numbers for — for some of our sources.
RITHOLTZ: So I mentioned world culture, that’s kind of interesting. Is there a lot of activity in who’s going to win Best Picture or who’s going to be the Best Actress at the Oscars? How — is that a seasonal thing when — each year or how does that trade?
LARA: Yeah. Launching the Oscar markets were – it was very important for us because they were the very – very first regulated derivatives, I guess, in the entertainment industry and Academy Awards. We have traded more than 150,000 contracts …
Ryan Wyrtzen: Really?
LARA: … in the Oscars so far.
RITHOLTZ: Wow.
LARA: … and it’s only been a couple of weeks. And we really expect the — the trading there to — to be a lot higher, closer to — to the ceremony …
RITHOLTZ: Right.
LARA: … or during the ceremony. But it’s interesting, a lot of people say that the Oscars are — are dead or irrelevant. But the movie industry is so big too nowadays, that there’s so much — so many people that are so impacted by the results of these awards, and things of that sort. And yeah, on the seasonality point, I think that the interesting thing about the entertainment industry is that you have awards, for example, like the Oscars or the Grammys, and we also have markets on. But you have weekly things, for example, album, sales numbers …
RITHOLTZ: Right.
LARA: … Billboard charts, and things like that, that we offer markets on every week and have a lot of room for like modeling and alpha, and things of that sort.
RITHOLTZ: So — so I know studios spend a lot of money on marketing and promoting, leading up to the Oscars. Because if a — let’s say a small independent film wins Best Oscar, it seems a huge — it gets a huge uptick in subsequent box office and — and other sales or streaming rights. I’m wondering if part of their marketing plan is going to include hedging on Best Oscar. They can not only spend, you know, a million dollars on promotion, they could buy a contract that offsets not winning Best Oscar.
LARA: Yeah, that’s our goal, is to get all of them to come and really hedge all this risk that they have.
RITHOLTZ: So — so where’s the volume today? Where are you seeing the most amount of activity? Is it — is it inflation and Fed activity? Is it GDP? What — where — where’s all the money flowing in on your platform?
LARA: Right. It’s actually interesting, because when we launched, we really expected it to be category specific or concentrated in specific categories or economics, entertainment, transportation, technology. But it really is about what — what the news are. So what’s top of the New York Times? What’s in the newspaper the whole day? And what’s in the news?
And right now, as you mentioned, the Fed March meeting is — is very — is a very — it’s a market with a lot of …
RITHOLTZ: It’s live. It’s hot.
LARA: Right. It’s very hot. Yeah, for sure. But for us, we’ve — we’ve seen this, like news-based activity lot, like the Omicron wave, as I told you. When the infrastructure bill was passing, there was a lot of activity over there; or when Jay Powell was going to get renominated, there was a lot of activity in that market. So it’s really about what’s in the news and what people see their risks associated with, and where they think there’s most room to make money. And right now, the Fed rates, people are really disagreeing on that. And there’s a lot of volume and volatility on that market.
RITHOLTZ: So — so you guys didn’t exist when Brexit had come up. That was before your time. But you have been around with Russia and Ukraine, and I noticed there’s not a lot of activity there. Why not do a futures contract on will Russia — it’s obviously too late today. But in January or December, you could have done a “Will Russia invade Ukraine by February 1st, March 1st, April 1st?”
LARA: Right. We avoid any contract that’s related to war, terrorism, assassination or — or violence of any kind. We don’t want to have those — those markets on our platform. But we do have markets that are adjacent to that. So for example, markets on the price of ruble or — or the price of oil, natural gas in the U.S. and Europe. So we have markets that are adjacent. We just don’t want to have markets directly related to war, terrorism, assassination, or those things.
RITHOLTZ: Makes sense. You don’t want to incentivize anybody to misbehave.
LARA: Right. Exactly.
RITHOLTZ: In the past, I’ve heard futures described as a marriage between hedgers and speculators. So if you’re an airline, you want to hedge the price of oil. But someone got to be on the other side of that trade, so incomes speculators. Are you seeing that same sort of relationship amongst Kalshi clients?
LARA: Yeah. I think Kalshi is one of the most pure forms of exactly this hedging and speculation match. I think one – a very simple example to understand this, if you think of rain in New York City, right? Like, you can have like an ice cream truck buying – an ice cream truck will be really — really hit if — if it rains for like a lot of days, because people will buy less ice cream. So they can buy a “yes” contract to really hedge that offset that they have.
On the other side, there can be someone that is going to speculate, and seeing there’s a forecast for 20% rain in the next couple of days and they are willing to take the — the “no” side because they think that there’s only a 20% chance it’s going to rain and — and it seems like they can make money. So then you can really have a match of like people that actually need to have a contract for hedging, almost like insurance, and people who – who because of forecasting and probability and — and what they think the fair value is, is going to take the other side. And then at the settlement, for example, if it does rain, it ends up being that everyone is happy because the speculator makes money, because they were correct. No.
RITHOLTZ: Right.
LARA: Right.
RITHOLTZ: The — the hedger is protected against the event.
LARA: Right. Yes. Right.
RITHOLTZ: And the speculator won the trade.
LARA: Right. Exactly. And exactly, you — you got it totally right.
RITHOLTZ: So — so let – that raises a really interesting question. Who are your clients? Are they hedge funds and institutions? Are they retail investors, or is it a whole spectrum of people?
LARA: We really focus now on — on retail. And our — our biggest amount of users right now is the traditional option trader, like informed retail options traders. But the way that we see this — this growing is we want to keep growing within the retail trading and options trading community. And then our next step is getting brokerages on board so that you can now go and trade on event contracts through your interactive brokers or e-trade account. And then after that, building enough liquidity to start bringing more prop shops in and — and smaller firms and then hedge funds and — and then institutions, and maybe we can have maybe a Burger King hedging, I don’t know, price of plastic straws or something like that.
RITHOLTZ: So — so the platform eventually becomes an exchange?
LARA: Exactly, exactly. I think we — we see it as a buildup of liquidity from — from retail that’s like smaller amounts, but — but — but higher velocity to — to hire bigger and bigger institutions, all the way to become like a full-fledged financial exchange like the New York Stock Exchange or CME.
RITHOLTZ: So let’s talk a little bit about how you guys, you and your co-founder, created Kalshi. You kind of were the opposite of Facebook. You know, Mark Zuckerberg famously said, “Move fast and — and break things.” Companies like you and Coinbase and BlockFi spent a lot of time getting approval from the regulators. Tell us a bit about why you took that approach as opposed to moving fast and breaking things.
LARA: Yeah. I think a lot of times people are making the short-term trade-off for speed. And in finance, I think it’s different. You can – obviously, you go to market faster if you choose the unregulated route. But with finance, there’s been like a lot of historical examples of unregulated platforms getting meaningful volume and then being shut down by regulators, because they weren’t properly regulated and doing things right from the start.
We really think that the opportunity really shrinks if — if you don’t take regulation into account, because then you can’t get real money in the platform. You can’t get real good partners, as we just talked about brokers, market makers, hedge funds onboard. Sometimes you can’t even offer products to U.S. customers. It really boxes into something small, very quickly. And that’s — for us to be the New York Stock Exchange for events, because that’s our goal, the only way to do that was to do it right from the start, going through the regulated path, and — and eating on the cost of the two years and a half waiting, but — but making sure that we’re set for success.
RITHOLTZ: So your — your co-founder, Tarek Mansour, he was an equity derivatives intern at Goldman Sachs in 2016. The same year you were a quantitative trader at Citadel Securities. So you guys both had a pretty bright career path. Had you not decided to go out and launch this whole new platform? Tell us what motivated you to say, “Goldman, Citadel, that looks too easy. Let’s — let’s launch a — a new startup.”
LARA: Well, that — that’s funny because actually most of our MIT time, we were both very focused on just getting finance jobs and never even thought about starting a company. But yeah, we were both very interested in math, financial history, finance from — from the very start of — of our school years and — and we worked with various financial firms. As you mentioned, Tarek worked at Goldman. I worked at Bridgewater, Five Rings Capital, which is a small prop shop, and then Citadel Securities.
At those internships, we really saw the behavior that we say is the Kalshi behavior over and over again. It’s like firms making trading decisions based on events. As we think the European Central Bank is going to raise rates, let’s take this massive position, or really find the structure to make that work. But the idea really crystallized in our heads when we were working, both together, at Five Rings. And there, we were playing this game almost the whole day. It’s called the “maker market” game that people — that everyone would be putting like bids and offers in the probability of something. And then the other person could only tighten the spread or — or trade against you.
And there was a single — there was a day that we were just trading — playing this game the entire day. And then I — I don’t remember exactly what market it was, but I took a massive position on Trump doing something. I don’t remember exactly what it was. And everyone thought I was crazy and debated me a lot on that. But I ended up being right. And then when I was — we were walking back to — to where the interns were staying, it was stuck in my head, like why isn’t there a place for people to do this? Like, we love doing this? We do this the whole day. Like, we see in every place we work at, like very big positions, people are trading based on events. Like, why is there no place to do this?
And then I sat down and started talking to Tarek about it. Like, why isn’t there — why don’t — why don’t we do it? And we stayed the whole night up talking about it. And it was just something we were so passionate about from the finance side, the product side, everything we always loved. And if there was going to be someone to figure it out, it was going to be us. It just then leaves us the idea for another six months, up until we were like, OK, like, this is a calling, we have to do it.
RITHOLTZ: So — so when you say your desks are – and you guys are trading back in 2016, trading events, you couldn’t credibly bet any sort of volume on events like Kalshi does today. You had to go to secondary or tertiary markets. So you’re betting on gold if you’re thinking about inflation.
LARA: Exactly.
RITHOLTZ: You’re betting on oil if you’re concerned about war. It’s – it’s always once removed, which raises the issue. Even if you’re right, you may not express itself in a market the same way that the bet was supposed to go.
LARA: Right. Exactly. I think that in the beginning of COVID, you had this exact thing happening with — with the economy and how you would think about the S&P. And the beauty about event contracts is that it’s direct exposure in what you think. There’s not like a lot of variables for you to keep track of or — or think about of things that can go wrong. That’s why we also think it’s very – it’s the most like natural way of investing, especially if you think for retail. They can’t like keep track or have full desks of people trying to understand what’s going on. It’s a lot easier to do when you have one opinion, and you have a very clear way to get exposure on what you believe in being right or wrong.
RITHOLTZ: So — so you’ve spoken about the gambling industry and how incentives are somewhat cloudy. How does your platform correct for that?
LARA: Right. The key part about gambling is that the house takes a position in the bets. So the house has an interest on the outcome of — of the bet or — or the market, if you want to call it that, but it’s more just the bet. We are just a financial exchange. So we — you can think of Kalshi a matching agent. We match people that believe something will happen with people that believe something will not happen. If they have equivalent prices, we match them.
So we have no interest in whether the market will go away a certain way. We do have an affiliate trader that’s there to provide liquidity so that people can trade, especially as we start the exchange. But the exchange doesn’t take any positions ever. We’re simply matching other participant orders. So there’s no conflict of interest between us and our members.
RITHOLTZ: So — so when you look at a racetrack and the odds are set on horses, those odds don’t quite add up and the shortfall is the house take. So it’s never quite 50/50. What does it cost to trade on this platform? What — what’s the — so in other words, if I’m betting a $100 that something is going to happen and I win, do I get $200 back or how — how does that work?
LARA: Right? So — so the way that it works is that the “yes” and the “no” prices are from 1 to 99 cents, and whoever is right gets $1. So let’s say I’m buying a “yes” for 40 cents, it means there’s someone buying a “no” for 60 cents. And if I am correct, I make $1, which means I’m profiting 60 cents which is from my counterparty,
RITHOLTZ: Right. What – what’s the cost of that trade? Meaning, how does Kalshi make money, and I assume since it’s fully collateralized, there’s a float. That’s going to be a good source of revenue over time.
LARA: We don’t make money on float. All of our — our — all of them, user member funds are in a fully regulated CFTC Clearinghouse, which is FTX derivatives, the U.S. derivatives, they are clearinghouse. And we make money on a transaction fee. So we have a small transaction fee that varies on the price of the contract.
RITHOLTZ: But what is it averaged ballpark? What does that cost?
LARA: I think it’s less than 1%.
RITHOLTZ: All right. So, we will have a conversation after we’re done, and I will show you that – I think it was Schwab. When they moved to free trading, their float became 57% of the revenue. So we’ll have a conversation. We’ll see if we can help raise your — your revenue target and – and we’ll go from there. Because especially — it’s one thing if you’re looking at events that are days and weeks out. But if you’re making bets on will 2020 be the hottest year in history, hey, you’re sitting with that money for 12, 11, 10 months. There’s a lot of top line to be gained from — from a little float. We’ll — we’ll work that out with the CFTC. That will be — that will be easy.
You guys raised $36 million in a Series A. Sequoia Capital was the lead, probably the most storied venture capital firm in Silicon Valley. Charles Schwab, not the entity I was talking earlier about Charles Schwab in the float. But Mr. Charles Schwab was an investor. Henry Kravis is an investor. Silicon Valley Angel is one of the early investors. And were you with Y Combinator when you were first launching?
LARA: Yeah.
RITHOLTZ: So — so that’s quite an esteemed list of — of people who said, “Hey, there’s some value here.” Tell us a little bit about the experience at Y Combinator and then doing an A round with some really boldface names.
LARA: Yeah. Our experience at Y Combinator was actually very different from most of the other startups. Like, we were measuring regulatory traction, and other startups are measuring user growth, or revenue or — or things — things of that sort.
Yeah, and about the Series A, getting a DCM was — was a key part of — of that Series A. I think Kashi is really one of those asymmetric type of investments. We are going to face obviously a lot of challenges and — but we — if we execute against those challenges, we’re going to have massive outlier potential. And we were really trying to find partners and investors that really understood the long-term vision of the company, and share that obsession that we have with event contracts and — and building this entire trading ecosystem.
So Alfred from Sequoia is one of those people. He — he did a PhD in these types of markets. He really, really understands it and sees the potential. And obviously, it’s — it’s a Sequoia Sequoia, as you said.
RITHOLTZ: Right.
LARA: So that was – that was definitely something we thought about. But — but Alfred, specifically, has historically invested in a lot of like paradigm shifting companies like Airbnb and DoorDash. So we really thought it was a good — it was a good fit.
And then after Sequoia was our lead investor, we were really trying to fill the round of – with Wall Street investors that could really help us navigate this industry. So yeah, Tarek, my co-founder, he’s obsessed with barbarians at the gate. So — so when …
RITHOLTZ: Hence, Henry Kravis.
LARA: Right. So when — when one of our seed investors, Ali Partovi, said he could intro and — and we could talk to Henry, I think Tarek was just like absolutely fascinated. And they had a fantastic conversation. He was very interested from — from the very beginning. And with — with Charles Schwab, it was something similar. It was also Ali Partovi introing us to — to him, also very interested in from the start, and he actually told us that our early days at Kalshi looked very similar to his early days starting Charles Schwab. So that was very exciting. And — and yeah, they help us so much till today so it’s fantastic.
RITHOLTZ: The funny thing about Schwab is people don’t realize the guy you see with the gray hair in commercials, that’s Charles Schwab. That’s not an actor.
LARA: Right.
RITHOLTZ: He really exists and has been running the company. Now, I think he’s chairman. But that was really him for — for a long time. So — so let’s talk a little bit about event hedging. And I like this quote, “These markets are a little like an aggregator of public opinion in real time.” So — so what are the implications of this? And is that the sort of stuff your lead investor at Sequoia was studying when he went to school?
LARA: Right. Yeah, this is a very important part of our vision. Over time, we really want Kalshi to become the source of truth for forecasting these events that we have markets on. Because of the prices at Kalshi go from 1 to 99 cents, they directly translate to the probability of the event happening. So let’s say the market might be saying there’s a 20% chance there’s a recession this year. It means that 20 cents means that there’s a 20% chance that the market believes there’s a 20% chance …
RITHOLTZ: Right.
LARA: … that there will be a recession this year. And the amazing thing is that there’s a lot of theoretical and empirical evidence that they are the most effective and most accurate ways of forecasting the future. They’re way better than polls, way better than like pundits on — on the news, trying to say what’s going on. And it’s mainly for two reasons.
I think the first one is because when people put money where their mouth is, they are more — more likely to say what they really think and actually do research and everything. And the second one is that markets really aggregate the wisdom of the crowds. You’re getting a lot of different people’s opinions, when they put money behind their opinion, and really aggregating data, and which makes this a very powerful tool. And I mean, any market lover understands what I’m saying.
And yeah, making — and — and part of our — our vision and what we really want to do long — long term is make these forecasts core to people’s lives. It’s really part of our mission. With — with event contracts becoming more widespread, we really hope that people will use data in their lives to prepare better for the future, address uncertainty, inform themselves better, and like try to address a little bit of the very biased world and not very data-driven world that we live in nowadays.
So we’re trying to get started with that. We’re really trying to get — we have market tickers like any other equity or things like that. We have tickers for all of our markets. So we’re trying to have tickers and prices to be used by news and things of that sort. So we really try to get this very important data, that we believe is very important data out there. But for Alfred specifically, I think he was doing more than like mathematical and like research. He was doing a stats PhD, so somewhat related to this, but not really on the — on the — on this side, but yeah.
RITHOLTZ: So — so let’s — let’s talk a little bit about prediction markets that are out there. Historically, they’ve only done a so-so job, partly because they’re not very broad. They’re not that very deep, and the dollar amounts that are traded had been modest. I saw an overlay of about half a dozen different prediction markets before the Russian invasion of Ukraine. And you would think they would all be kind of similar, but they weren’t. They were all over the map. Do you have to get to a certain scale that will fix that problem of prediction markets being kind of thin and easily — I don’t want to say manipulated, but one big trade really has an impact on — on how those markets trade.
LARA: Right. Exactly. I think we need a — a base level of liquidity and — and volume for — for the forecast to really work and be really useful. And a lot of these like other prediction markets out there, as — as we talked about, they’re unregulated. They have — they’re very new. They just pop up, especially the crypto ones every other day. And it’s hard to build liquidity and real proper volume like that. But we really think that prediction markets are the way to go to have these — these very good forecasts of — of events, but it needs liquidity and needs volume, and that’s what we’re working on.
RITHOLTZ: Really kind of interesting, which raises the question, how are you going to scale this up? How are you going to get to 100 million and then a billion, and then who knows what from there?
LARA: Right. We have a lot of ways to — to scale the exchange. It’s kind of what we talked about with — with building up liquidity. Right now, we’re really focused on retail. So getting — we have a lot of option traders, or like what we call informed retail traders in the platform, trying to go in more – deeper into different communities, and trying to get them in to test the platform, things of that sort.
And then the next step for us is getting brokers in to offer our markets in their platform, so e-trade, interactive brokers, all of those. And then bringing up the volume, we can bring up like actual liquidity providers, prop shops, hedge funds, and then up until, I guess, insurance companies even offloading some risk or — or like actually big institutions, natural hedgers, bringing them in. So the way that we’re seeing it is really starting to build of retail with getting more and more of the current users that we have, which are option traders, and having more retail as we go to the — to the, I guess, brokers.
RITHOLTZ: So — so how big can this get? I mean, is this ever a billion dollars a month? How — how large can this sort of event hedging scale up to?
LARA: Right. So event contracts are a lot more like tangible, relatable and — and more direct, as we talked about, then all these other assets that — that preceded it. So we really think when we actually plug it in the financial ecosystem, it can properly scale. Obviously, it takes a lot of time to get there because we need to view the entire ecosystem around events.
RITHOLTZ: Right.
LARA: It’s a completely new thing. But once it’s properly plugged in the financial system, I can give you some numbers to give some idea, right? I think you mentioned that in the beginning of the CFTC regulating a trillion-dollar industry, like grain futures are $7 trillion industry.
RITHOLTZ: Wow.
LARA: Commodities, 20 trillion. Interest rate swaps are around, I think, $500 trillion. So not exactly how big the market is, but I think as we expand event contracts, it definitely has a potential to be one of these.
RITHOLTZ: Right. Interest rate swaps are $500 billion or trillion?
LARA: Trillion.
RITHOLTZ: Really?
LARA: Right.
RITHOLTZ: That’s the notational, nothing is going to get offered?
LARA: Right. Yes. You got that point.
RITHOLTZ: That — that’s a giant amount of money.
LARA: Right.
RITHOLTZ: So — so really, startups have a tendency to have this defining moment in their lifespans, where they sort of either pivot or just a moment of clarity, and you could see the whole roadmap laid out. Did you guys have that sort of defining moment at Kalshi?
LARA: I would say the biggest — the earliest defining moment we had was actually — before we really started the company, we went to a Y Combinator hackathon. Because before we were like fascinated by it, but we didn’t think it was like going to work. It’s like — it seems so complicated, and like, are we crazy? I think that was the big question in our head, like are we going crazy over here?
Then we went to Y Combinator for a hackathon. And there were like these teams with like bunch of servers, crazy computers like — and it was just me and Tarek with our like Macbooks, like try to — to code like a demo of what we were talking about. And then we first presented to Michael then, the CEO of YC and he really didn’t like what we were saying from the beginning. He cut us. Like the first five seconds, he’s like that, like “This is illegal,” like, “What are you doing?” And then we will get very upset. We went in like we – I think we — Tarek even started drinking beer. He’s like, “There’s no way we’re going to be in the Top 10,” which had to present again. And we ended up being in the Top 10. We presented again, and then we ended up being in the Top 3, which were the winners of the hackathon.
And I remember that night, when we were going back to — to our friend’s place where we were staying in San Francisco for the hackathon, we were like, “Wow, like maybe we aren’t crazy. Like, we should — like maybe like people believe in what we’re doing.” And it was a very like happy moment for us. And I think right after that, we actually got into the Y Combinator batch. And it was one of the happiest moments we’ve — we’ve had — we’ve had of the company. So that was really like motivating and encouraging, because as I told you, we never thought about being founders. We thought about being like he was going to be — we were both going to be traders full time. So it was like a big shift for us. So that was a very exciting moment.
RITHOLTZ: Really interesting. Let me throw a couple of curveballs at you. You and your co-founder, Tarek, both were named to the Forbes 30 Under 30 list in — in the finance category. Tell us a little bit about that. What was that experience like?
LARA: Yeah. No, it was very excited. We were very honored to be — to be — to be nominated, especially being like the head up of the — of the finance category. We were really excited after all the work we’ve done. And actually, a funny story is that because of the Forbes 30 Under 30, I went viral in Brazil for a little bit, because the Brazilian Forbes wrote a — wrote a piece about how a Brazilian was in the American Forbes 30 Under 30 and that — because it’s very rare to have Brazilians in the list here. So that was — that was — that was a funny story. But yeah, because of the Forbes 30 Under 30, we also ended up ringing the opening bell at the NASDAQ, which was very exciting.
RITHOLTZ: Interesting.
LARA: Yeah.
RITHOLTZ: And one more — one more curveball. You were a ballet dancer with the Bolshoi. You studied ballet. Tell us about that.
LARA: Right. So very different from what I do now, for sure. But I’m from Brazil, originally, and I just came to the U.S. for college. And most of my life before college, I was split between ballet and school. What — what I really loved about ballet was intensity of it all. It was extremely hard to get to the top. It’s extremely competitive. And there’s nowhere to hide, you need to be completely on, you need to give it your all.
And yeah, and I — I studied at the Bolshoi Ballet School and it was extremely intense. And — and we had to be extremely disciplined, like measuring our food down to like a four puffs of strawberry before this rehearsal, to be able to get there. But that was –that was one part. And the other part, my — my parents are both engineers and have stem backgrounds.
So I was surrounded by that outside of ballet, doing like Math Olympiad and all of that, I also had to get 100 on everything on the math and science side. So I used to do like normal school, I guess, from like 7:00 a.m. because Brazil school’s hours are different. so 7:00 a.m. to like 1:00 p.m., and then ballet from 1 – like 1:30 p.m. to like 9:00 – 10:00 p.m. And then I would actually go study. So that was a very intense part of my life, but I think it really set me up for — for being able to go to MIT and — and — and enjoy everything there.
And it’s something that Tarek is very similar to me, he was actually a professional skier before going to college. And — and we have very similar backgrounds. And I think that level of intensity and — and discipline is really what helped us get through the regulatory process and be where we are today. So tough times, but it’s good now.
RITHOLTZ: I — do the same thing. I measure my food input down to the quarter strawberry. And you could see it’s how I maintain my girls. So — so we only have certain amount of time left. Let me jump to my favorite questions that I asked all of our guests, starting with what kept you entertained during lockdown? What were you streaming, watching or — or listening to?
LARA: Right. I listened to all and — and I’m very into American politics nowadays. So I’m finishing up the 10 American Presidents podcast. But on TV, I think I’m more mainstream. So I just love Succession, House of Cards, West Wing, and so on.
RITHOLTZ: Let’s talk about your mentors who helped shape your career.
LARA: Right. So I think at MIT, I had two professors that were very impactful in my career and to me. I think the first one was Patrick Winston. He was my advisor and professor, a lot of artificial intelligence classes. He really helped me navigate MIT and set me up to — and set my mindset to where I wanted to be, to like really psychology.
And the other great mentor was Peter Kempthorne. He’s also professor of stats, and really, I started being interested in finance in his glasses. And funnily enough, he’s actually one of directors of — of Kalshi nowadays, because we kept very close contact. And we talk a lot to him about like the dynamics of markets and all the stuff we talked about.
And since we started the company, I think our biggest mentors have been Michael, the CEO of YC. Up until today, he’s helped us so much. And Ali Partovi, who’s — who runs Neo, he’s one of our seed investors. And they have been really instrumental in like making us better founders, not just like making the company succeed, but better founders and how to like deal with employees, growing — like growing pains, negotiation, all of those things that, you know, like MIT nerds didn’t really know what to do.
RITHOLTZ: So let’s talk about books. What are some of your favorites and what are you reading right now?
LARA: Right. Some of my favorite – my favorite book is this book called “Americana,” but it’s not the novel. It’s actually the 400-year history of American capitalism. But whenever I say Americana, everyone thinks is the novel. And the other one is this book called predict — “Predictably Irrational,” which is …
RITHOLTZ: Dan — Dan Ariely?
LARA: Right. Yeah. And it’s — it’s very — some — it has a lot to do with what Kalshi does and I think it’s one of the early books I read on — on prediction markets and decision-making, and I thought it was a fantastic book. And at the moment, I’m finally — Tarek will be very happy to hear this. I’m finally reading “Barbarians at the Gate” after he told me for years that I should, but I barely started, so yeah.
RITHOLTZ: And Americana is a Bhu Srinivasan, am I pronouncing it right?
LARA: Right. He’s that.
RITHOLTZ: He was a guest here a couple of years ago. I love that book. That book is just amazing.
LARA: That’s book is fantastic. Yeah, it – yeah.
RITHOLTZ: Those people think that, oh, all these companies were, you know, freestanding. It was a public private partnership …
LARA: Right.
RITHOLTZ: … for a long time. That — that is a fascinating book and I’m surprised someone, as young as you, has found it. It’s sort of off the beaten path.
LARA: Yeah. No. It’s — it’s a fascinating book. It made me — especially not being American, I think it made me understand the country and how it works so well, I think, way better.
RITHOLTZ: So — so this is the first time I’m going to ask this question of somebody who is so recently out of college, but you’re 25 now, is that right?
LARA: Right.
RITHOLTZ: So what sort of advice would you give to a college student or a recent college grad who is interested in a career in either startups and technology, or finance and derivative training?
LARA: Right. I think the finance industry is very — there’s a very traditional path that people can take. And what really helped me and — and Tarek understand and — and really come up with the Kalshi idea and — and — and understand it and work on it was that we got a lot of exposure to a lot of different types of firms and a lot of different types of roles as well, like we did. I did more of the engineering side, then a little bit of the trading, then a bit of research. And Tarek did like all types of different trainings, because he also worked at Citadel, and Five Rings, and Goldman.
And I think that giving yourself a lot of breadth, especially when you’re in college is very important to just understand the industry as a whole, understand when there are gaps, and — and seeing — like finding patterns, like how we found the Kalshi behavior. So I really think it’s about putting yourself out there, trying to learn different things, do different things and — and trying to get a global vision of — of what the industry is and why you want to do, and — and not be too tied to like the traditional path of like entering as like this level and then going up in a big firm and — and things like that.
RITHOLTZ: And our final question, what do you know about the world of trading, and hedging, and investing today that you didn’t know, what do I say, four years ago when you guys were first starting out? You’ve been doing it since 2016, so let’s call it six years ago.
LARA: Right. Yeah. So what we’re really doing is — is enabling trading and investing. But if I were an investor, what I think I would have liked to know a couple of years ago is that bold bets are — I would take a lot of bold bets. I think generally that’s – the bets that seem ridiculous at first and there’s a lot of debate, then there’s no way that it’s going to work, are usually the ones that are achieved, like the large outlier results.
Definitely, I’m biased because Kashi is hopefully one — is going to be one of those bets for a lot of our investors. But I really think it’s about seeing what the world can be in the future and — and taking bold bets to get there. I think a couple years ago, I’ll be very — if I were an investor a couple years ago, I would be very scared to do that. But now, I would think that’s the way to go to really do meaningful investing.
RITHOLTZ: Quite fascinating. We have been speaking to Luana Lopes Lara. She is the co-founder of derivatives trading marketplace, Kalshi. If you enjoy this conversation, be sure and check out any of our previous 400 interviews we’ve done over the past eight years. You can find those at iTunes, Spotify, wherever you get your podcast fix.
We love your comments, feedback, and suggestions. Write to us at mibpodcast@bloomberg.net. You can sign up for my daily reads at ritholtz.com. Follow me on Twitter @ritholtz. I would be remiss if I did not thank the crack staff that helps put these conversations together each week. Sean Russo is my research assistant. Mohamad Rimawi is my audio engineer. Paris Wald is my producer. Atika Valbrun is our project manager.
I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.
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