Luana Lopes Lara is the co-founder of Kalshi, an exchange that lets ordinary people bet on everything from the path of inflation to what bills Congress will pass by the end of the year.
Her problem: How to you build a market like the New York Stock Exchange that lets people bet on real-world events?
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Pushkin. I could turn on the news right now and find someone making a prediction about the future. They might be saying there's no way Congress is going to pass some particular bill by the end of the year, or maybe they'd be dead certain that the US economy is about to start shrinking, And you know, I could try to parse the logic and assess the evidence behind the arguments. I could try to figure out whether these forecasters have some ulterior motive. But I mean, come on, I don't have time to do a research project on every claim some pseudo expert makes in the news. What I want is some source that will aggregate all these different predictions about the future. I'd like it if this source could give more weight to people who have higher conviction about their views. And ideally this source would force the people making prediction to put something on the line, to put some skin in the game. I want the people predicting the future to gain if they're right and lose if they're wrong. I'm Jacob Goldstein, and this is What's Your Problem, the show where entrepreneurs and engineers talk about how they're going to change the world once they solve a few problems. My guest today is Luana Lopez Laura, co founder of Calshe dot com. Alshi dot com. You gotta spell it every time I do. It's a hard name. Calshe is an exchange kind of like a stock exchange, but when people use Calhee, they don't make bets on stocks. They make bets on what's going to happen in the world, everything from what bills Congress is going to pass to what's going to happen with inflation. Calshe's problem, Luana's problem is this, how do you become the New York Stock Exchange of real world events. It turns out that in the United States, if you want to let people bet on real world events that are not sports, you have to get the approval of US financial regulators. Last year, cal She became the first major prediction market to get that approval. Their site went live and started taking bets from ordinary people. Last summer, Louno, inter co founder, went to MIT and in the summers they did internships on Wall Street trading desks. That was where they got the idea for calsh But it wasn't what the traders did for work that inspired them. It was what they did for fun. Constantly placing these tradeable bets with each other on everything that was happening in the news. They called it the market maker game. So we used to do that like all day and the jobs video like just turned around. Then you make a market on this news going up on the TV, and and it was pretty much the whole day. Because it's a lot of like just trading stocks, this kind of behaves the same way, right if it gets low and you want to buy low sell high, you think there's a fair value. And we did that all the time. So how did that lead you to start the company? Right, So this is one part of it. I think the other part that was pointing us more into this prediction market route was really that through our trading experience and fro our Finest experience, we really realized that most trading is just based on events. I think the best one example of this is, for example, Brexit. Right like when my co founder was a Goldman, a lot of different firms were calling up like his exotics trading desk a Goldman and being like, I want to get exposure to Brexit. So they would come up with this very complicated type of bundles of like volatility swaps, effects and things like that. So it's basically investors are like, well, I think Brexit will affect the market in a bunch of different ways, and I want to either make a bet or hedge some risk that I have. But there was no way you could just say give me money if Brexit happens, or I will give you money if Brexit happens. You couldn't just bet on the event. No, and yeah, And for us, when we saw this like repeated in many different experiences and coupled with like how much we saw people just like to trade on things, it was just nagging on our head. Why is there no direct way that people can just trade on what they think is going to happen, trade directly on events to get direct exposure. So we decided to that if someone was going to do it, it it should be us, and we embarked on this crazy journey for the past three years and a half. But that was kind of the start. If the question is why doesn't a market like this exists, Why isn't there a place where people can just bet on events happening or not happening. What was the answer why didn't it exist? The answers planning clears was regulation. Basically, the background is events are deemed as commodities and commodity derivatives trading are regulated by the CFTC, which is a Commodity Future Trading Commission, a US regulatory agency that never sees things like what oil futures and wheat futures and lots of things like that right now, giant markets, right yeah, So huge big regulator, big market, and it clearly falls under their jurisdiction. So you decide you want to do this, You realize that you have to get the approval of this big US regulator, the commadi's Futures Trading Commission, yep, and then you just go to them and say, can we do it? No, not at all. I said my background before, but I'm a computer sciences I have nothing to do with I don't know anything about the law. But we knew regulation was a big thing, and we also knew we didn't know anything about it. So the first day of what we did is we just created a spreadsheet of like sixty names of possible lawyers that we could call. You knew you needed a lawyer, We knew I needed a lawyer. So we went like one by one and really like everyone was saying no, it's not even worth your time, like you need ant same amount of money, and they're gonna say no, Like they're gonna say no, They're gonna say no, They're gonna say no, they're gonna say now. So you're calling all these lawyers on the list and people are like, don't bother. Bad idea, not gonna work. And then what happens, right, And then I had a friend who went actually to Harvard Law school, and then she had another friend who had a friend who had a friend and then like for fourth degree connection, we got connected to this law firm in New York and then that law for New those lawyer that works with us too today. His name is Jeff Ben. Then he was an x XCFTC official. Okay, and he said maybe let's think about it, and we're like, look, we're gonna take anything we can get it and maybe it's better than know. And then it's just a huge long engagement of like present to them, you send certain materials, They give a lot of feedback on what they think is bad, which is always massive list, and then you go back to them and they are like, okay, these ones maybe and then like this one's was still concerned about this and now we have all these other concerns. How long did you think it was gonna take when you started, Um, we initially very very optimistic and thought it was gonna take around six months. And then and it was four months. We were like, we were crazy to think it six months. It's probably like a year. And then it's nine months. We're like okay, and many mum, a year and a half. And they kept going, and I remember when it passed through the two year mark, we were like, what are we doing? Like we just you know, graduated from my team. We should like be making some money, have a job, and we're just here, like, you know, fighting through this thing and like nothing launched, no contract traded, nothing. If I told you from the beginning, we knew what was going to happen, and we knew it was gonna work, and it would take this amount of time that'll be a lot. We knew. We didn't know anything, honestly. So is part of the case you have to make to the CFTC why your exchange is useful and not just a casino? Yeah, so what is that case? Simply, what's the simple version of why calcy is useful. Well, there are people have a lot of risks that they don't have access to hedging for nowadays, Like normal people cannot hedge mortgage rates going up or things like gas prices or things like taxes going up. And these are real risks a normal everyday American face, and it's the job of the CFTC to regulate the way for them to also get access to this hedging things that the big guys can do. I will say, it's not clear to me that regular people would on average be able to hedge in a useful way using prediction markets. I feel like, to me, what seems like a more interesting possible case for the utility of Kelshe is sort of a wisdom of crowds idea, right, like the idea that people go on the news or whatever and say things about the future, but like they might be lying, they might be wrong, They might be saying something because they have an investment they're not telling you about. But when people are betting their own money on something that's going to happen in the future, I am more inclined to believe them. Right. So, if there's a big, well functioning market where lots of people are betting lots of money on something that's going to happen in the future. That seems like useful information. Absolutely, we call this like the tax on bullshit, right, It's yeah, it's so cheap to just go on Twitter and look at inflation. Right last year everyone is like, oh inflation, it's nothing. Oh we're going to see hyperinflation. And if you just have a market where people can put money where their mouth is and actually be like, I actually bought this position, this is what I believe in, you really take out a lot of like the bullshit, a lot of the you know, just exaggeration for like hype and things like that. So let's actually look at it. Signed up for Kelsey a couple days ago and I put one hundred bucks in my account, and I want to I want to make a bet. I'm not supposed to call it a bet, right, What am I supposed to call it a prediction? To take a position? Yeah, I trade the prediction anything. You want to call it a tanne. It feels like a bet to me, I'm gonna call it a bet. Um. So okay, So I'm looking now, So it looks like there's a lot there's a lot of econ stuff, like you'd expect what's going to happen with fed interest rates? What's gonna happen with inflation? Weather? The weather in New York, the weather in Chicago. It's like the weather tomorrow, right. Yeah? There are some some of our users like a crazy satellite data to trade on these markets. Interesting yea? And how big are they? I'm seeing numbers here, but it's hard to know exactly what they mean. Like how much money are people betting here? Um, I think we're doing around like more than two million dollars a week. I think two point five million dollars a week. By the way, what's is there a limit on how much people can bet or invest or steak? Yeah? Right now, we have a twenty five thousand dollars limit on how much you can lose, so not in how much you can win. So you can win up to I guess two point five million if you get the one percent long shot, but you can lose up only up until twenty five k at the moment. Okay, why why that limit? Did that come from the CFTC. No, that's actually came from us. We wanted to, you know, start slow and make sure we're not breaking things. I think we worked very hard on the regulatory piece, so we want to make sure we keep everything going the right way, slow and don't break Facebook zactly. We are. We are the anti Facebook for sure. So we started this way. I think that we are going to have to raise the limits going forward, especially as we grow to bigger players and bigger institutions. We're here, so let's pick one. Um, So here's one permanent daylight saving time bill becomes law. Yep uh. It's a fun one, like I kind of care about it. It's a little bit silly, like I want to I want to bet on that one. I want to take a position on that one. Okay, So I'm going to click on it, and it says and it's by the end of the year. Basically, it says buy yes sixteen cents, buy no eighty seven cents. So what does that mean? That means right now you can buy a yes position for you said sixteen cents, Yeah, sixteen cents, So you would walk in sixty cents to be able to get eighty four. So if you're if you buy a yes, you're you're locking in sixteen to get eighty four. If you're right. Okay, great. So so it's like, uh, what is that five to one or so? I think so around that yeah, math on a math on a podcast, and so just I mean the context on this one. The Senate passed a bill earlier this year that would make daylight saving time permanent, and now it's kind of stalled out, and so the market is clearly saying this is probably not going to happen. Yep. But it's not like it's not one hundred to one shot that it won't happen. It could happen, right, And I mean I want kind of a long shot, right, I don't want to win ten bucks? Who cares? Right? And the fact that it says buy yes or sixteen, does that mean someone is offering to sell it for that price some other market participant. Yeah, someone's willing to buy the note for eighty four. Okay, so that's why you can buy the yes for sixteen. And it's Calci in the middle on this. Are you just taking a fee? No, we are in exchange, so we just match people on both sides. So we just matched the yes in the No. Let me take a small fee. So okay, so I'm gonna beat one hundred bucks right now, I'm just gonna do it. I'm gonna wild own. This is big for me. I'm not much of a much of a gambler trading for contract amount, okay. So I just type one hundred bucks one hundred okay, So for my hundred bucks, if I'm right, I'm gonna win four hundred and fifty five dollars. So, so it says fees five dollars and fifty one cents. It's about five percent, is what you're taking on this trade? Yes? Yeah, that's why we take a calci. Okay, and what are your fees? Just on average on average reaction at point eight percent? Wow? So I got hose. Yeah, because you were taking a position you actually paid. So so when I sell, when I get out, I don't have to pay. You won't pay anything. Okay, Well that's right. So it takes the sting off a little. Right If if you're building limit orders, if you say adding up price or saying I want to buy or I want to sell out this price, you pay no fee. So oh interesting, Okay, because I'm bringing liquidity to the market, okay, Okay, I'm submitting the order. Okay, So now I own it. Yeah, that's it. Now. The thing that's interesting to me is I don't have to wait and see if this thing happens, right, I can sell to somebody else who wants to take a position. Absolutely. So if you go to if you click sell on the screen and you go to a limit order, okay, so I'm gonna sell for forty cents and I'll get paid back two hundred and twenty two dollars if it happens. Yeah. So like maybe I feel like for that if some powerful person in Congress just says, yeah, maybe we're gonna do this right, it's in the news. If there's one little blip, maybe the market will move my way and then you just sell automatically. You just made two hundred dollars yea, and that can made one hundred bucks one hundred year, and that can happen any time between now and the end of the year. Yep. So like I got some action now, yeah right, And I do feel like, I mean, you know, people have different feelings about gambling, but like I'm definitely gambling here and it's okay, right, Like I'm a grown up. I have a hundred bucks. Yeah, no, it's I mean, any futures market has speculators and has headers, right, Like obviously, even if you look at the grain market, like the big firms on Wall Street that has the entire desk dedicated to shading grain, they are not hedging, like they're not worried about their farm production, and they are also speculating, but they're speculating it with a lot of data and research. It's just degrees of speculation. And like price discovery is a useful function of markets, right, ABU tells the world what people betting a lot of money think is going to happen about important things. Absolutely, with inflation, our markets predicted inflation will get this high and actually beat the Bloomberg forecast six out of the seven past reading is just because again, if you put money where your mouth is, and if you have an actual market dictating the probability of things where it's just you know, people going out and saying, oh, I believe this is going to happen, you get like way better data and this data, so I think it's so important for especially the world are in now Okay, well let's talk about inflation. That maybe the big one right now, right in terms of the economy, what are traders on CALCI predicting about inflation for the next oh what for the rest of the year. Say, yeah, so this month now June, it's predicted to be around one to one point one percent the month over month CBI, and for the whole year between eighty nine percent. I think the markets do think it is going to start going down, but I guess not at the rate that everyone wants to. How big is the calcie market for inflation? How much money are people betting in that market? It goes around like two hundred three hundred a per per month. Okay, so small, that's very still small. Yeah, you know, as I'm looking over the things you can bet on here, I mean I want there's a couple of questions come to mind, right, Like one, what are things you're not allowed to make markets in or that you don't make markets in. There are certain notorious cases, right like war or terrorism or assassination, and I assume you wouldn't do that. Oh no, not at all. And these actually are explicitly You're you're completely right, like more assassination, terrorism, these are actually explicitly cut off. And are there people who are prohibited from trading like can insiders trade. No, yes, there are people who are prohibited from trading. Insiders cannot trade. Let me ask you this. Members of Congress sort of notoriously are allowed to trade on the stock market, even if they have inside information about what Congress is going to do. There are on your market. There are things is Congress going to pass this law or that, including the daylight savings law. Can members of Congress trade on Kelsey? No, they cannot. They can trade on markets that are not on the ball of this market. So if they want to trade on I don't know the weather in New York, they can do that. But no, no congress person or or their staffers can trade on the Funnily enough, we have this market on whether the stock trading band for Congress is going to happen this year because it was very big news and we opened the market us to be clear, members of Congress can still trade stocks, but they cannot trade the CALCI contract on whether they are going to ban themselves from trading stocks. I'm pretty sure that's a metaphor for something, but I don't know what it is. In a minute, the problem CALC has to solve to go from being a little site that almost nobody has ever heard of to being the New York Stock Exchange of event trading. That's the end of the ads. Now we're going back to the show. So what do you want to do that you're not doing now? I think for us that the biggest thing is growing roading. What we have our vision is to be like the New York Stock Exchange for events. And we really think that events have the capacity to grow and be like a mainstream and you know, boring commonplace asset class. And our dream is to get there and really like be the exchange and help you the environment around it. So for us, it's always about innovating and releasing new contracts that are very relevant and then hopefully growing the pipe. But we want to integrate with for example, biggest other parts of all streets are getting brokers to offer our markets, getting marketmakers to come and provide liquidity. So our goes to really like buel this exchange up with more contracts and more more liquidity, more people and I mean your customers now our retail. Right, they're just people like me, just like ordinary people, which I would not have guessed. Right, there's another universe where what you start with is institutions, right, big companies working through investment banks betting not one hundred bucks but you know, one hundred thousand bucks or a million dollars right like that in a way seems like a more I don't know logical place to start. Yeah, our goal is to have these guys and institutions also come to Kaushi. I think our strategy was pretty much like on the liquidity building. We thought it was easier to start with retail and then built some base of retail users, then bring in specific marketmakers who provide liquidity, and then with the market makers who bring brokers. That will increase a number of users and then more liquidity. The issue with starting in exchange with very big players is that the level of liquidity you need is very For somebody to take a big position, you need a ton of money on the other side, and with a very new asset class like hours, it's very hard to find the person to be on the other side. We thought it would be a better strategy to kind of like do beauting up versus like trying to to start from from that side, because then we would need like hundreds of millions of dollars on the other side. Very complicated to to start from there. For us, now, it's really about bauting liquidity, right. It's it's about having what we have that's working and making this a massive scale. Like you know, when you think about stocks, you're like, you can buy almost any amount in any price, yeah, tiny spreads. Right, it's really exactly easy and efficient to trade stocks, right, And it's for us, the strategy is not to just like try We obviously want to get a lot more traders on the platform, but it's also about having key partnerships with some Wall Street firms, having partnerships with specific brokers that have traders that do this themselves and bring them in and start having these kind of like we'll call like step functions in terms of liquidity. I think for us, our next challenge is like, Okay, you guys were able to get this through the regulation, you're able to start playing the game. But for us to start winning the game, we need to start building liquidity and getting more traders. And it's it's really about that for us, it's what we're focused on. And so it's that move like getting Calcy onto the robin Hood app or like the Schwab app is it on the retail side or like is it getting traders at some firm to trade on Kelcy, Like what is the next step two sides there. I think on the market making side, we want to integrate and have like the big Wall Street companies who can think about that, the generally provide Citadel maybe like Citadel, Jump Trading, Optiver, all of these big high frequency traders who essentially make the market on the stock market right And for them, it's what's interesting at cal She's that obviously is very uncorelated to everything else they do. But also because the spreads higher, they make more money for them than what they think about is the problem that it's too small for them. Well, that's what we're working for you. I think that. So most of the month's work out ship we were very much focused on learning and getting the product to a right point. Now we're really starting to focus on growing the use case and the user base. Sorry. And this fits with the other part, which is actually integrating with brokers. So like getting the exchange connected to interactive brokers, Schwab, Ninja, Trader e Trade. We built all of these guys. It's kind of a game of like we need a time This very well to be able to get the brokers and the market makers out the same time. But the idea is to start doing that, getting at least like one broker, one market maker, then more then it's like a real big thing. That's the goal. And so that is interesting, right because that's not like, oh, we just need to grow five or ten percent, right, It's like what you have now is almost it's like proof of concept. It's like, hey, here's the thing that works. But it's not real money. I mean, if if you're thinking about like the real finance amount of money, it's not yet. And our goal now is to is to get it to be there. We were one hundred percent focused on on this and is something about to happen? Is there something in the works? There's some partnerships that can comment on, but there's there's some cool things coming along. How like by the end of the year for what do you mean the partners Yeah, yeah, I think our goal is to buy the end of the year have let's say at least the one worker and at least one market maker on the platform. That that's our goal. Like that would be a big jump, right, yeah, it would be because it would be like a year and a couple of months after launch, and I think it would really be able to take the business to the next step. Why did nobody do this before? Why did no exchange do this? The Chicago Mercantile Exchange is this giant exchange that has markets and things that are kind of like what you have markets in some of them are even the same, right the oil price. Why didn't they do this or why didn't some other giant well funded, uh, you know exchange do what you're doing. I just don't think they're very like innovative in some way. No, no, not trying to criticize, but if you ask me if they're going to come in, I'm sure. I'm sure we're going to get a lot of competition. I think there's a lot of eyes into the space. And I think that's actually very good for us because for Coushi to be very successful, we need a vent contract to be very successful for us. So we've more players, and we believe the industry can grow and we think we can win if it's if it's had to have a regulated company like CME, but but it's always good to grow the pie. There have been small election prediction markets for a long time, but not that much money is allowed to be traded on those people have been so interested for so long, but it has never really been a thing until now. And I still don't think I understand why, Like why didn't anybody do it before? Nobody has done it until now, or nobody has been nobody's gotten regulatory approval. Right, there's like unregulated crypto prediction markets. Why didn't anybody do this until you did it? Yeah, I think, I mean the regulatory piece is the biggest one. Most of the cases, what actually happened is they tried to launch it, and then when the CFC went to say what you're doing is illegal, it was it's too late, like there's no like you know, moving fast, and then saying like I'm sorry, I didn't know, Like this is not how it works with financial regulation. So most of the cases were actually people doing it illegally and then the CFC saying you shut down right now, and they're like okay, And obviously if they've done something illegally before, it's very hard to sell to the CFTC that you actually care about compliance. Yeah, but there's obviously a lot of other timing things right that helped us. I think the rise, as you mentioned of unregulated crypto prediction markets, it's it's very hard for the CFTC. It's a game of alcamole if you're just waiting for the next crypto thing to show up, and like, how are you going to work on enforcement? In all those cases, I think it's important for them to have a regulated alternative. That's say interesting. So the fact that crypto allowed more unregulated prediction markets to crop up gave the CFTC and incentive to say yes to somebody who wanted to play by the rules. Right, I don't actually know if they thought about that. That's something I think happened. So just to be clear, they never said anything like that. It's it's what I think about it, because obviously something I asked myself, well, like why why us Luana and her co founder did the work. They did it at the right time, and they kept doing it until the CFTC said yes. Now they just have to solve that hard problem of getting lots more customers by partnering with retail brokerages. At the same time they're getting lots more liquidity by partnering with marketmakers. If they can do that, they can go from being this weird little website where you can bet on the weather to being a giant financial exchange. We'll be back in a minute with the lightning round. Now, let's get back to the show. Okay, let's do the lightning round. Let's do some fast questions. I'm good. What's the biggest bet you ever made? Oh? I've made a big bet on the election with my best friend. How'd you do? I won? I bet? Aga? How big? That's big? It's a big bet. I know, I know, I am. I have a lot of the trader nature in me. You like you like gambling and general No, no, really, this is actually no, this is actually my only I'm very bashion about politics in general. So this was like kind of my first and only think. Never did any like sports batting, for sure not. I'm like a very actually traditional investor. So you were you were a ballet dancer yep, earlier in your life. So what's harder running a company or dancing the Nutcracker? Oh? The Nutcracker is easier, So I would say the running running I picked the wrong ballet. Yeah, that's iving sw on lakes harder. It's just it's it's yeah, but it's swan Lake versus running a company swan Lake harder. I think so because the level of like physical uh demand that you have with ballet is like it changes our entire life. Like nowadays, if I want to still, like I don't know, take Saturday night off and go to dinner, I can still do that with ballet. It's like it's about everything. If everything goes well, what problem will you be trying to solve in five years? If everything goes well in five years, I think at that point we would be focused more on like international expansion. And at that point, I think we would really be on boarding what we really called like natural hedgers. So if you think about like I don't know, on Heiserbusch coming to hedge, a change on beer legislation and putting like hundreds of millions of dollars in one position, I think that's why we would be focused on if everything goes we all liquidity wise, I think five years is very ambitious to be doing that, more likely ten. But we're getting these like massive natural hedgers to come to the platform. That's like the end game. How will you know when it's time to do something else? You know what? I ask myself this question multiple times. I actually have no idea. I actually have no idea. I think it's probably when we run out of all of our money and all of our employees leave, and then probably I don't know, my family or my friends would be like, come on, I think it's time to try to do something else or move on. But I don't really see that happening unless it is kind of like a discomplete catastrophe or something. I mean, that's the sad ending. There's a happy ending where the company is doing great, right, But you don't think of that one. Oh yeah, no, I don't think of I mean, you know, for every startup, it's very likely that you're going to fail. Like in the beginning, it was like like now it's probably a little less than that, but it's uh, it's still very likely that will fail. And if you if you start thinking about that, there's no reason to take risk and start a company and try to actually do something different than make a change. So I try to focus exclusively on the happy hay scenario and the good things and and keep pushing and see how, see how it's gonna go. Maybe I am wrong, I know, in the future, but yeah, when do you think another company will get CFTC approval to let people trade events. I think the window could start by like end of this year, beginning of next year, well soon, I think they couldn't like start like getting more serious. Let's make a market in this one though, Let's have it day right, there's a day, Okay, you could have a market on cal you could head, Oh, you're not allowed to bet, We're not. We're not. I would say. I think there's like, um, thirty percentons that by the middle of next year, we're gonna see someone else like fully focused on events. I think that by the middle of next year, someone will get a yes from the CFTC. Trying to think which side of that. It's a subtle it's you set the line just right. Also, you have more information than I do, so i'd be afther. Luana Lopez Lara is the co founder of calshi dot Com. Today's show was produced by Edith Russolo, engineered by Amanda Kwong, and edited by Robert Smith. I'm Jacob Goldstein. Next week on What's Your Problem, we make the case for why America must pass a permanent daylight saving time bill before the end of the year.