¶ Intro / Opening
Bloomberg Audio Studios, Podcasts, radio News.
Hello and welcome to another episode of the Odd Thoughts podcast.
I'm Tracy Alloway and I'm Joe Wisenthal.
Joe, we're here in Chicago.
I love it here so much. We don't come here enough.
I agree. Chicago is an amazing city.
It's also just such an interesting city from a financial perspective, and it has that old school, you know, mercantile Midwest kind of feel totally.
I mean, it's what's cool about Chicago. Many cool things, but it obviously has the history of trading and pits and you know, trading pigs and all that stuff, and it's still a city that's at the cutting edge of trading, and so it's pretty cool that, like the history is like not just history, it's still when I think of capital to trading, I usually think of Chicago.
Absolutely, And one of the themes for our trip to Chicago this time is trading and the evolution of trading and also the retail revolution that we're seeing. And on that note, we have some very interesting partnerships that have been developing between I guess old school exchanges and more let's just say more retail oriented platforms.
So I think there's the thing that I think is really interesting that's going on in financial markets, among many other things. Is it seems like there's two different entities that are trying to cannibalize each other.
Yeah.
And the way I think about it is you have these sort of legacy well, you have essentially these sort of maybe like gambling oriented entities or what people think of as speculating, wanting to look more like legacy financial institutions. And you have legacy financial institutions that want to subsume
¶ Chicago's Trading Evolution and Retail
the sort of high speed trading, speculative gambling impulse of many young retail traders. And it's like, which one will swallow the other? Will it be that I trade on my sports app?
Well?
Is it will I be trading cotton futures on my sports app? Or will be the opposite? Will I be going to a traditional brokerage to place bets on a Raiders game.
That's a great way of putting it. I also have to say there's a little bit of an irony here because a lot of the old school exchanges used to be criticized for enabling gambling in derivatives contracts right and now and now are considering sports betting. It's all very confusing, but I have to say we have the perfect guests to talk about the cutting edge of trading and the retail revolution. We've had him on before.
He was great.
We're going to be speaking with Terry Duffy, the chairman and CEO of CME. So Terry, thank you so much for coming back on all thoughts.
Tracy, Joe, thank you very much for having me. Appreciate you being here in Chicago.
Also, well, the last time we saw you two years ago, you said we were going to be replaced by AI, and that hasn't happened. So I'm very happy that we're back and talking to.
And we have a tape that because I do that's true.
I got free the transcript you have.
Everybody remember something, but let me see the proof.
I'll send it to you after this, all right. So one of the reasons we want to talk to you about retail trading specifically is because CMI just announced this partnership with FanDuel. Where you're going to be offering these sort of event contracts. Walk us through exactly what the partnership entails.
Well, the partnership is really interesting from a whole host of reasons. I believe that the market in general has changed, and the evolution of the market has changed. The participants have changed, and we can all determine why that is. We can listen to what Joe said in his opening about how traditional exchanges want to have the gaming clients in their world or we could say that the gaming clients want to have the traditional finance people in their worlds.
These worlds have been clashing for quite some time. Now. Why is that? It's all because of technology. Technology has enabled the participant from all levels to be on a level playing field, so example being institutional participants traditionally had the greatest technology, and in return, the products were custom sized for institutional participants. As the market's evolved, retail participants want to be able to participate, but they really couldn't
¶ Technology Reshaping Financial Markets
participate at the size of a contract that the institutions can. So we customized over the last several years smaller and smaller contracts whatever. They went from e minis to micros and potentially nanos. And now we're looking into the prediction markets going forward. Why is that, Well, there's a host of reasons, but like I said, technology and let's talk
about it again. Artificial intelligence. It's the hottest thing God put on the planet right now as far as financial services go, because otherwise the stock market would not be trading where it's at today. Because the market has been driven primarily by artificial intelligence stocks over the last forty eight months. For sure, there's no other stocks really participating to weigh in. Nvidio and some of the other big
ones are. So my point being is today the guy that would never be able to trade futures because he's got a five hundred dollars account or one thousand dollars account or that's what he has available to participate, and now we're able to give him the technology that Goldman Sachs may or may not have. That some of the biggest hedge funds in the world may or may not have. How he or she deploys that is up to them,
but they're going to have access to that technology. That's why these worlds are collecting and I think it's massively exciting about the future. And people, listen, we're going to have the biggest wealth transfer by twenty forty We're going to have eighty trillion dollars go from I think it's twenty fifty from the existing population to people of the age of forty to twenty four, eighty five trillion dollars of wealth transfer. People want to be in control of
their own destiny. Why, because they've grown up in control of their own destinies today that age group, whether it's through the apps on their phone or other things. So I think having access to all different constituencies is really important, and so I'm excited by the future of this marketplace.
Let's just talk more details on FanDuel. Is the idea basically that let's say I'm or I don't. I've never gotten into sports betting, but suppose I did. Suppose I were, you know, and I open an app and I see the line for the upcoming Raiders Bears game or.
Whatever it is.
Is the idea that in that same app, I may see the price of some the gold futures or interest rate futures or something that I can trade at a monetary denomination that is sort of we associate with retail level. Is that the specific product or service that the CM is going to be offering with FanDuel.
So Joe, yes, it's similar to that. So today FanDuel is set up a little bit different than some of their competitors. They don't have one app for all different services. They have single apps for different services, where some of the other ones have different apps, and for whatever reason, they feel it's an advantage. So there will be a markets app, a FanDuel markets app powered by CME Group.
When you open up their homepage, you'll go to that app and then you'll see in there we'll have potentially three to four event contracts a day per assa class. The events will go on for approximately sixty minutes. They're not like a sporting event that goes on throughout the event. It will be a sixty minute window. Then we will say will the price of goal be above or below three seven hundred dollars an ounce at the.
End of that sixty minutes.
¶ CME's FanDuel Partnership Details
Yes, they're very binary, and.
You will see as the opening of that event starts where the price is set, and it might be set at fifty cents, it's going to be above it because it's kind of in the middle, or if it's higher, it might be eighty cents to say it's to be above it, but there's nothing to say it's going to
be above it. So you'll have people taking both sides expressing their interest on the value of gold, which will also give us the ability because we have the liquidity providers in our core asset classes, so the deep pools of liquidity with this will be amazing.
Just to be clear, is the sixty minute window? Is that just like the first round? Like eventually, do you anticipate that it'll be weekly or monthly or something that resembles the time intervals of traditional.
It's a great question, Joe. So what we're going to do is we'll probably run three events a day for say gold, we'll run three events a day for crude oil, We'll run three events a day for the S and P five hundred, We'll run three events a day for some of our other asset classes treasuries. And these will be multiple events, but they're only going to be an
hour long. But we'll probably run three to four sessions every day, so there'll be an hour per session, and that will run five days a week for markets and if in fact fan who wants to put sports up there, as you know, those are weekend events as well.
Well, let me ask the really sexy question, then, how exactly are these trades or contracts structured and you mentioned the liquidity providers. There walk us through exactly the mechanics of these trades. Who are the providers, what does the market making look like, are they being cleared, how does it all work?
They will be essentrally cleared through CME's clearinghouse, so yes, they will be. The market structure will not look too dissimilar to what we have today. The market participants, we have multiple market makers versus where some of our competitors have a single market maker doing this. We will have as you know at Cema Group, we have a lot
of market makers in our different products. They will have access to these event contracts and they will create the liquidity throughout the day and we will incent them to make sure that the participants have a tight, deep market. So that's basically how it'll work.
And do the market makers have to hedge their exposure or are these contracts so small that it's not a big.
Deal or you know, small content can be small tracy, but as you know, you trade enough of anything that's small turns into something big.
And I'm sure you want this to be big trading once we do so.
But that will have access to layoff that risk in the primary markets, and that's the big difference with our offerings. So we will be offering our deep liquid products and we'll have events with them, so our market makers will seamlessly be able to offset these contracts you'd said in the beginning, or not by the way, or not that's like them.
You said in the beginning that technology is part of the story of why these two worlds of gambling versus legacy finance are have been colliding or maybe merging, et cetera.
¶ Mechanics of Event Contract Trades
And I believe that, And I also believe that there is no such thing as a bright line between what's investing and what's speculation. There's a lot of debate about all of that, but is another element here, essentially that the norms have changed. There used to be an expectation that you know, retail investors didn't have access to say like private private invest It used to be much harder to gamble on sports.
Period.
There's been a big change in the norms, it seems. And then follow on regulation such that by and large it seems to be conventional wisdom that people should be really allowed to trade anything they want on anything they want.
Well, I think there's some truth to that, but I think that's a pretty broad brush.
Okay.
Should people be able to trade anything they want and anything they want? I think you listen, regulation breeds credibility to any product, and if it's not regulated to a point and it's a while west, somebody's going to get hurt. And that's not what a company like mine that I'm determined the CEO of and I have been for the last twenty three twenty four years now, that's not something
¶ Investing, Speculation, and Regulation
that I would want to bring forward into this company. You said something else that and I'm going to get back to the regulatory part, but you said something really interesting. Is it investing or is it speculating? Let me ask you a question. This is rhetorical. You ever see an investment that doesn't have If you're making an investment, you need somebody to take the opposite side of the trade
and if another investor is going the same direction. There's reasons why Oracle went up thirty percent two weeks ago after their announcement. Why because no one wanted to get run over by a freight train. But you need speculation in order to increase investment. So I think that people say that speculators are bad for the market, Well, who's going to create the liquidity for the investors if we
don't have speculators, So that's zero point one. Going back to the regulation, I think that when you look at the regulation for these products, we have to let the participants be made aware through education and other tools of what the rules of the road are. And I think right now with the crypto world where it's going right now, in some of the other marketplaces where they're at under predictions,
I think there's some confusion. I'm going to be doing a roundtable in DC this coming Monday associated with just these type of topics, what's innovation, what's not and so Joe, I think your questions are really really strong, and that's one of the reasons I'm doing this deal of FanDuel because I want to walk before I run. Here. I think it's really important. But I do want to make sure that the retail participant has the ability to participate
at their level. That's why these contracts will be binary nature. That's why these contracts will be a dollar so anybody can participate. But again, I think that the ultimate regulatory framework as it goes forward has yet to be harmonized. For a lack of a better term between traditional marketplaces and now we're looking at event contracts on sports and other indices. So I'm excited by this, Joe, But I think there's a lot of what you said in your
question that's yet to be answered. And the problem is right now, there's a lot of people going out with offerings before these questions have been asked, answered or for sure studied.
We've talked to someone, we're talking to some more of.
Them for sure.
Okay, Well, speaking of regulatory harmonization, I'm just gonna I'm gonna hit all the really provocative topics today and ask about tax treatment, because my understanding is that losses on futures contracts are treated differently under new tax rules than losses on platforms for sports betting and things like that.
How much of the interest that you're seeing from places like fan Duel and other markets is coming from, I guess the possibility of people being able to trade with futures contracts or bet using futures contracts and not having to pay as.
Much in tax.
So let's make sure we understand both sides of the equation. You said only losses gains as well, so we'll talk about tax treats in general. So what Tracy's referring to, listener, is that odd loss is what's called twelve to fifty six contracts under the tax code, which allows people to get a blended rate of sixty forty tax treatment. Sixty long term gains forty short term comes out to a
blended rate of about twenty seven percent. Futures contracts cannot get long term capital gains because of the way they expire today, so we don't get long term capital, so we get what's called twelve fifty six treatment. That's what Tracy, I believe you're referring to.
That was a great explanation.
By the way, thank you should host Thank you anyway, the twelve to fifty six contracts, So when you talk about sports, sports will not be treated on event contracts under the twelve to fifty six regulation. But Gold Equities all our other core businesses on events, we will believe that they are event futures, not event swaps. So swaps
are not treated under twelve fifty six. Futures are. So we think our events on our market participants and those products will be treated with the same tax treatment we get today for our other businesses and then events such as entertainment such as political events and sporting events will be traded as ordinary income.
Got it, Are you going to enter political betting markets?
I would not take anything off the table. It's not something that I support at this moment. But there's a lot of things I think when people say they don't support and then all of a sudden they do it, and you go, well, what changed your mind? And you don't have a good reason. So I never said I wouldn't list bitcoin. I just thought it was important to make sure that the timing is right. So I waited till twenty seventeen. Then one day I said, today's the day,
because the timing seems right to me. So I never said I wouldn't do it, even though there was a lot of people between two thousand and eight when the price of bitcoin was eight dollars to twenty seventeen when I listed it that said that this stuff is tulips, it's garbage, don't trade it all right.
Let's say you're thinking on the politics.
Markets, so I'm going to into the politic So I don't believe right now that event markets on politics are a good thing. That's my take on it. I want to see how it goes out. I didn't like mail mail in voting either. I thought voting should have been in person historically. But my mind has changed on that too for a whole host of reasons. Because now we get more participants and we have technology to protect against bad behavior in voting. I think we can get the
same on these event contracts for different events. I don't know if it's there or not yet. We've had one political event contract that was listed so far that we're
¶ Tax Implications for Event Contracts
aware of, and that was the presidential election, right, So that's for the most part, that's all that's happened. I think that's kind of a small sample of a political event contracts to base your decision on it. Is this good or bad? So I kind of want to see how it goes doough to answer your question. So I don't see the rush to get into it. And the reason why I don't see the rush to get into it if you look at me today with XRP on a Ripple crypto contract, we are the premier place for
people to mitigate and manage risk on Ripple. Now, I was one of the last people to get into crypto in twenty seventeen, but yet we have one of the biggest marketplaces I just listed Ripple, So the credibility of CMME is very important to me. I think it's important to my customers as well. That's why I'm very cautious about some of these political contracts. So that's why I was trying to tie the two together. Little fair enough, Yeah, fair enough.
So you mentioned going to a roundtable next week, and I believe that's the one being held in DC.
Is that right? Okay?
So I know the CEO of CALCI is supposed to be there.
Never met him.
One of the pre eminent prediction markets in the world. When you see him, what questions would you ask in order to better understand political prediction markets.
I mean, we're interviewing him tonight in Chicago. I know, basically Tracy's asking research ask him.
I don't know the gentleman. I've never met the gentleman. I have no idea. I think what's important is that he understands that we because the CFTC, and that's what they are suggesting right now, which is true. So I'm not saying what he's saying is wrong. They self certify these contracts. Does it make it right for him? To list all these different contracts because the CFTC's got twenty four hours to make a decision to either stop it
or let it go. It's really hard under the self certification process to understand anything in twenty four hours, especially
¶ Caution on Political Betting Markets
for the government. So the question I would have for him, as I do for myself, is how are these some of these contracts not novel and complex? And don't you believe that your investors need a little bit more time by the government agencies to make sure that everyone's comfortable so you can offer them in a way that is very sound mind and sound business to grow and versus just going out there after twenty four hours of nobody objecting and now you're promoting and he is promoting that
these are CFTC approved products. They're technically that it is wrong. They are not CFTC approved products. What they are is they have not been opposed by the CFTC. There's a big difference there, and that's the part that they are not disclosing to their user base. And so I would say to him or others, and I will say it because I say what I want to say to people respectfully. I think disclosure is good. It's like payment for order flow. I don't think payment for order shall flow should be
on the thirty fourth page of a perspective. Put it up front, tell the clients that's what you're doing. And nobody's got a concern with it. But we don't because why And I would say that people are maybe a little thinking that maybe it shouldn't happen. I think it helps the marketplace. But tell people that earlier. And I think that's what you guys should ask him. Why won't you say that these are not approved? They're just not objected to Joe.
I'm going to do my best Terry Duffie in Passion tonight and just ask that question for BA And if.
You drop my name by Monday, could be a lot of fun.
But no, this gets to my quish about norms because, like so political prediction markets have existed in the US on very small scale for maybe like twenty years. It was the Iowa it was an experimental at the University of Iowa, et cetera. It feels like the floodgates have gone open and that actually, you know, under the last administration, for better or worse, kelshy polymarket, which it's another sort of can of worms. They were under a lot of
regulatory scrutiny, investigations, and they still operated, et cetera. Now it seems like the door has been flung open. Maybe like it basically seems like we have, whether from a strictly legal perspective or a cultural perspective, very little appetite
¶ Critiquing Prediction Market Regulation
in this country to say you can't do this. It feels like, yeah, the barn door is open on a lot of this.
So Joe's let's talk about that a little bit because I think it's interesting. Under the Commodity Exchange Actor is a provision where a contract cannot be readily manipotable. Okay, all right, so that's a law. So when we're looking at prediction markets on political outcomes, and we're talking about a presidential election, we're talking about one hundred plus million
people potentially voting, with the base voters more open than that. Fine, Okay, maybe we say understand, Okay, that's no different than some of these other big markets. That's a big market all of a sudden. Now we'll take it down to the Congress. We have less people voting and a congressional race for Congress. Correct, so every member every five hundred thousand people gets a member of Congress in the United States. So you know, you got five hundred thousand people of a population gets
a member of Congress. The voting population for that is much much smaller that's eligible to vote. Now, let's take it to the next level. We have got a local mayor's race and a suburb that you live in that there is five hundred people there. You want a prediction market on that, because I'll tell you what, I can probably buy that election and have my prediction market be payoff in a big way, and that would be deemed
readily maniputable. Now I gave you a pretty wild spectrum there, sure, but I think you have to look at it and at range. That's my whole point what I said to Tracy earlier. We have to let people know what they're doing. Because every political event is not a presidential election. There are some political events that are so small that could be deemed readily manipotable, and you don't ever want to get in that situation because that's how you destroy innovation.
And that's my concern with some of the political markets.
Joe, remember when we did that live experiment at our show, what was our big takeaway from that.
I don't remember it. Take away it's very funny when we had the manifold market of whether it's Zemashwitz would be on the Odd Laws podcast, and then we brought him on stage and we saw the price adjust in real time.
Just to be clear, we did not bet that he was going to be the podcast.
But you know, he could have could have.
He could have, He could have certainly. Okay, let's broaden out the conversation a little bit to overall retail trading, which has obviously become a big part of your business. When you think about the evolution of retail trading at CME over the past few years, what are the biggest takeaways in terms of, I guess, the needs or concerns of a retail trader versus an institutional or professional one.
Obviously you talked about contract size earlier, but like, what else do you see out there in terms of key differences.
I think the key difference is the ease of access for the retail participant to sign on to a platform. Historically has been very very difficult, in a very difficult process to sign up to trade markets, whether they're securities or whether they're futures, so the retail participant will go through an application and probably get to halfway through page
one ago. You know, this is ridiculous. There's a reason why Tracy and Joe at the dark market or the illegal market in gambling is still about three times larger than the regulated marketplace because people just don't want to be have that exposure of giving out their information right, So it's still a very large market, the illegal gaming market.
I think that when you create a greater ease for people, which is going on right now for us, especially with the FanDuel, you'll go through an Apple, it'll be a five click process and you'll be ready to go. That historically has never happened. Secondly, the retail participants have never had a place to go to clear their trades. As you know, at CME, we don't directly take clients. They have to come through one of our member clients. So those people didn't want some of these really small clients
because there were a risk. But technology all of a sudden is allowed the risk management tools to let them participate and you could do And one thing I liked about Sam bank Mephy's offering, and I give Sam credit for this was auto liquidating. Auto liquidation is something that a lot of people have already implemented. They call it something different. So that risk management tools that we have in place that others have in place, has now allowed us to take on the retail clients and the ease
of them coming in. Thirdly, I think it's really important that you educate them what exactly they're doing, and futures can be very frightening. People get very frightened. Like during the pandemic when the explosion of day trading started to happen again, there was a lot of people that were on somebody these retail platforms that have positions on that don't even know how they got them on because they
didn't understand it. But they were almost embarrassed to ask what happened, whether they got caught up in an option stradgle or something else. They did not even realize what happened. So education is key, and that's one of the things that we have been constantly hammering home. So that's why I think the retail business is very exciting. For CMEME and for other platforms around the world. Ecosystems are important.
One of the things I tell my team all the time, I said, you better look over your shoulder and see a line of clients always coming, because the day you look over your shoulder and it's gone, you're in trouble. And if you want to be a gigantic institutional player, I think that's great, and that's what CM is. But we have to make sure that we can move loutterly left and right. If you look at historically the growth of markets in what's happened in the nineties. There's a
building across the street from me. It used to be called the Sears Tower, Okay, named after Sears and Roebuck. They got naming rights over it. When Sears was flying in the nineties, eighties and nineties, they never heard of a
¶ Revolutionizing Retail Trading Access
company called Amazon. Nobody knows what a Sears is anymore. Seris is gone for the most part, right, So why did that happen? Because they didn't adapt, because they felt that their vertical was so strong along with some of the other ones, and these other new participants came in and destroyed them. I cannot allow that to happen. So for me to participate in the new world and protect the world that's going on today is really important.
My dad used to love Sears Joe because he said, you can always find a parking space there.
Oh that's great, that's a great reason. It's your shop. Well, actually, let's pick up on the Seiars versus Amazon. There could be someone who listens to this conversation and here's your concern about the speed with which Kelshi lists contracts that aren't you know, technically CFTC endorsed. And they might say Terry is trying to keep his position by dint of
regulatory regulatory mode, et cetera. That ultimately Kelshi or some or any others, but they're the ones in the headlines these days that they could potentially be a major player in futures in the future, and that one reason to talk about, oh, there's these concerns is regulatory concern. And also you know, like there's not like a toime. You know, you, as the CME, if I believe, correct me if I'm wrong, have had very strong pricing power for your futures and tech.
In most of finance, margins have generally been going down, Fees have been going down, Brokerage costs have been going down. Someone might hear the story and say, you're trying to protect your our ability to continually expand price by doing things like going to Washington and warning them about how scary it is these new prediction markets.
Well, first of all, I wouldn't do that because I'm partnering with Fandels, so that's not something I'm prepared to go say these new prediction markets. I will say that certain prediction markets could be potentially scary, like political outcomes and things of that nature. So I wouldn't say all prediction markets are scary. So I think that's a bit
of an overstatement. Second of all, on pricing power, if you look at the price of CMME today on a per contract basis, it's cheaper now than it was twenty five years ago. So you might say to me, how could that possibly we got all this pricing power, Well, there is also another company. As long as we're talking about with retailers. Let's talk about Walmart. There's a Walmart model. How about selling something for less, but selling a hell
of a lot more of it. My volume today, I do more in the first hour than I did it in a week back in two thousand and two. So the question is we do more because we have access to around the world, which allows me to make see me more.
Prices have not compressed for prices and your prices have compressed it my price is.
Today versus what they were in O two are completely different because when you look at the headline price, you're not looking at the tiered pricing that certain constituents get for volume. So volume pricing discounts are massive within our world.
¶ CME's Strategy for Innovation
So that is a big deal. So my average rate for contracts sixty nine to seventy cents a contract. You know, it can be higher or lower, but the volume could be a lot less too. So we do quite well with the model that we have, but we also have pricing on market data and other products that's proprietary to CME that you may charge different for, so that's different. I don't go to Washington to ever be anti competitive because I'm going to be anti competitive. It doesn't serve
my interest for the long run. Anti competitive people in natures is good for the short term, but really bad for the long term because you want that ecosystem, as I said earlier, to continue to grow and if you're smart and innovative enough, you will grow with it. And that's one of the things that I'm looking at with Cmeme That's why I did a deal with Fanuel fandel Is thirteen million accounts active today in the United States. Those will have access to my products. I never had
that before. We're doing things with our retail participants today that I think some of my predecessors over the years ago, What the hell has he done that we never would have done before? You know, And I believe that if we still did nothing around innovation, we would be trading pork bellies. We would be trading onions, which are illegal. They dumped them along the river and kept the burlax sacks. Pork bellies are gone. They're no longer here, so we'd be out of business.
Is the best thing when you go to Washington, maybe they got to fix that onion thing, prediction market, fix that onion.
Tell them it's the only commodity in the world that's banned by Congress. And I think we talked about that last time we were together. But I think Joda, to your point is I don't go there saying this is bad or this is good. I go there and say, let's have eyes wide open. That's that's all I want, because there's nothing worse than have If someone gets sick and we all get a cold and we go, how to hell did that happen? Well, that's not good for
the participants, not good for the institutions. And right now, when you get newer entrants coming in, I'm not saying they're skirting the process. I'm not saying kelshy skirting the process. But when you say you have CFTC approved products, let's make sure that the public understands what they are. They are CFTC products that have not been objected to. There's a difference there, and I don't know if the end user understands that. That's all My point was.
Yah, Treasury futures are a huge part of your business, and I know you've been critical of Howard Lutnick's new effort to set up his own sort of offering there.
What exactly are the issues that you see there? And I guess what can the CME do possibly to become more competitive in that space against you know, you haven't had that many competitors before.
I've got a lot of competitors throughout the years. And there's such a thing called efficiencies in the marketplace tracy that capital intensive worlds that we live in today because of a whole host of rules going back from DoD Frank into other BASL rules and things of that nature. For the banks, we create today around sixty billion dollars a day of efficiencies for our market participants every single day, and in my interest rate area it's twenty four billion
dollars a day of market efficiencies. That's money freed up that the largest participants in the world can use it for other areas. They don't have to park it with me to be in compliance anymore because I created those margin offsets for them. I think that's really important going forward. So the other part of your question was Lutnik. Lutnick, Oh, okay, so I don't have an issue. Listen, he's a tragy,
he's a commerce secretary. His offering. My concern with his offering is the following, and I'll say it one hundred times. They are clearing that US Treasury futures contract in the UK under UK law. In the United States, the law states that if you clear a cash treasury, which is under the new law coming up under the Treasury Clearing Mandate rules, that it's an SEC single regulatory mandate, meaning you go wherever you want, but the SEC is going
to regulate you. My concern was that futures expire into cash. So what's the difference between a future and the cash market. Once expiration happens on the future, why wouldn't you treat them the same? And why would you allow UK law and UK bankruptcy to let US participants in our foreign sour indet there's twenty seven trillion dollars or US treasury
is outstanding today. If we have a problem like we saw in London with the metals market of nickel, where they busted the trades, they didn't do a risk management, they just busted the trades which left people hanging. What's to say that the Bank of England doesn't do that with the US treasury market if in fact somebody has an issue, and if they have an issue with that, what's to say that that part of the market that they did that on doesn't have a bigger impact on
the US market. So my issue is the US, like every other country in the world, should have the laws of its foreign sovereign debt be by the laws of that nation, and we don't have that in this particular situation. Every other country in the world has the laws of their country applied to their sovereign debt, except the United States on futures, and they can say, well, it's a derivative. No shit, it's a derivative. It's a derivative that turns
into the cash product. That's exactly what you're trying to protect. So that's my argument. I told mister Lutnick, I told Congress. I told every regulator in the world, if he wants to put that offering in the United States, let's go. I want to compete with him, and I'm going to London.
Do you have a good sense of that?
Why?
Yeah?
Why? Because they believe that the swap dollar swaps market that's in London, which is completely different than futures. Dollar swaps, is fixed versus floating. It is not issued by the United States government. Treasury contracts are issued by the government. Futures, like I said, turn into the cash. So they believe that because there's a large pool of dollar swaps being
cleared at London clearinghouse, the offsets will be greater than cme. Oh, I see, but that's not the case, because I just explained to you that we give twenty four billion dollars a day in efficiencies and our interested complex. The only way that that larger pool of swaps would be relevant in creating a better offering is if they had any
futures volume. You have to have the future's volume. We have one hundred percent of the future's volume here at CME, and for every one of those futures contracts, we have a swap, a dollar swap at CME that offset and if we didn't then that would be a problem. So the question is, if you're sitting at a dealer anywhere around the world and you're holding US futures and you can save the capital of an offset swap, are you going to put it at elseh because they're nice guys?
Are you going to put it at seeing ME to be part of that twenty four billion dollars because it's going My point is the futures has to grow in order to get the larger pull of the swaps offsets, And right now, for every swap contract that's out there gets the offsets against my future products. Today we're not missing out on anything. So his offering is a charade game of saying, look how big that is. Okay, it's big, but no one needs it right now. The future's market
is what it is right now. It's big, but we have the swaps to give the offsets. Does that make sense to you? It does?
Yeah, we got to get you on stage debating what niche at some point that'd be great.
Yeah. I can't stan any bed right now. I'll wait till he's done, then we can do it.
Well, you didn't say the bad you know, I was not expecting earlier to hear you give a little bit of a hat tip to Sam Bankman Freed. But there's
¶ The Treasury Futures Competition
another thing, and actually Sam Bankman Freed was one of the main advocate, sort of pushers of it, this thing that emerged out of the crypto world, of a perpetual futures and could they apply could we have oil purpse? Like, is there any reason this model it's rather than oil, it's like the December future of the January, the twenty
twenty eight future. Is there any reason that this tool, I guess, product whatever it is that sort of emerged out of crypto couldn't eventually be applied to all of these legacy hasset classes.
Against the Act. A futures contract yeah is defined as a product that is to be price determined at a later date. Okay, it doesn't say it will be and you have to have a haha test right on that. So a fifty year perp is not a later date.
So that was just because that's a joke when you say ahaha test.
Yeah, that would be like if you created a fifty year perpetual, which some of these people are doing in Europe and others. They say, well, they're perpetuals, but they'll they'll do a few years. Okay, that's not that's not the definition by law.
If law were to be changed in the US, would you see that as a innovation that could be useful for these markets that you trade.
There are certain markets that could never become perpetuals, and there's a reason for that. So let's talk about what those are. If you have a perpetual livestock or grain market, how in the world am I going to make or take delivery on something that.
Never expires, immortal cows?
How am I going to make or take delivery on the food markets of the United States, which is very integral into pricing of these so deliverable products. What else is deliverable? The United States treasury market is deliverable because they expire, They expire. So my point is a perpetual would not work in deliverable products. So you say, well, what about cast settled products terry would that work? I
don't know if they would work. They would the index would continue to go, but again it would not fit the definition under the law of a futures contract, because whether it's cash settled or physical settled, the definition is the exact same thing for a futures contract, and it's not the perpetual definition.
Let's talk some more general macro I guess, and we touched on treasury futures earlier, which again big part of your business.
There's talk of.
Another potential government shutdown. I'm very curious how you think about that. How much of your time you spend thinking about that possibility and what it means for CEME risk management or is it the case that we've been here so many times before you kind of know what the playbook is.
You always think you know what the playbook is to some extent tracy. But again I think that if you the one time that you apply that strategy and you go, whoops, what do you mean it happened? You know that's a problem, right, So you always have to be prepared and we are. I think if there is a shutdown, which I think there very likely could be, I don't think it's going to be the shutdown that is going to be a disturbance to the economy. I think it's going to be
a disturbance to parks and recreations. It's going to be some of the other disturbances, which this is where it bothers me. Social services. You know that's a problem. But what does that mean for the financial system? Not so sure, But you know, people social Security checks getting out on time? Does that get delayed? That's a problem.
Economic data getting reported in the time.
I think that when you look at they've always kind of carved that economic data out with the USDA and other entities. They've always gotten the data out through past shutdowns, and I do think that the pressure to reopen the government will be immense from both sides of the aisles, so that they will have to come to it. Even if it's a short shutdown, I don't see it being
a long one because of the reasons. The social services that are so important to so many constituents of Congress need to have happened.
So this actually reminds me going back to the different the varieties of event markets, and we talked about the political risks, which I find very compelling, especially at the small elections. There are other things that are traded on event markets that, to my mind, a hedger with a sort of economic stake might want to hedge so portfolio manager who might be worried, what if we get a super weak jobs print that could really bust my trade.
On these other prediction markets, you can bet is it going to be over one fifty, is it going to be over two hundred, is it going to be below one hundred. You could also maybe someone who's very bullish Tesla for their robots division, wants to is barish on the cars. So I'm going to go long Tesla, but I want to short the prediction market on their volume car sales, et cetera. These are different than the politics ones in the sense that they're not as easy manipulatable.
There's something else. How do you feel like there seems to be some It strikes me that there could be a real economic justification for the existence of these event markets.
Again, Joe, I'm not going to disagree with what you just said, because I think that the more risk management
¶ Understanding Perpetual Futures Contracts
tools we have is better. What you just described was risk management. You did not describe a gaming type scenario. You described a company of Tesla that has multiple divisions that you like one, but you're a little worried about the production of their cars. So it happens every single day, and it's been going on in the market for one
hundred years called peratrating. So you sell this and buy that right because you're not quite sure when the event's going to happen, but you know it's all spread it up a little bit.
It just seems to me that there's this proliferation of possible tradable events now in part because of these new platforms. So you know, when we think about hedging risk, maybe a bigger surer wanted to hedge out some interest rate risk or something that makes sense. But these new platforms are offering very specific things like bet on the car sales number or bet on the jobs number, et cetera.
Is that a space that you could see again, it's a risk management that could see me get into events such as that.
Again, I think when you look at specific events that you just outline, I'll use Tesla to your example. I would have to see what the interest is by the participants. Because if you get a contract that you list you whether it's a prediction market or a standardized contract, and no one wants to trade it, then it's an irrelevant contract anyway. So I like to say that, and where I hope the people in main don't hate me, because
I've used this example a few times. There's people in Maine that think you should have a lobster futures contract, right, but you know who wants that, people that are in the lobster business. The rest of world doesn't care about that because we can't afford lobster, and we can we just pay for it whatever the price is. So there really isn't a marketplace there for the speculators to participate in. So is that the same situation with what you al and I'm not suggesting it is, but that's up to
the participants. That's why we're very careful not to put out products that we think that there's no demand for. We research what massive constituents about what they think they need in order to manage risk, and we're hearing different things. Now does a product come out like a prediction market where everybody goes aha, I finally found a holy grail on how to lay off my risk. I don't see it.
I think the prediction markets that will be listed will be driven by the demand of the participants, not the market itself. Does that make sense to you.
I really want to launch a a lobster prediction market now, lobster price prediction. I think that'd be a really interesting experiment.
There used to be a cardamom futures that was traded in India and I tried reaching out to the regulator. I wanted to do a story about a dead futures contract that didn't I couldn't get I gotta try again because I'd love to like the story of a futures
¶ Government Shutdown and Market Impact
contract that just lost. Yeah.
Sort of on this note, do you see any indication of big institutional investors, I guess taking some of the strategies that are deployed by retail or sort of imitating retail in some way. And what I mean by that is I think about one day zero day options. When those first gain traction, a lot of the activity was through retail, and then the institutional sort of got pulled
in and got really into it. Is there evidence of institutional becoming more like retail and certain patterns of behavior or certain interest in certain products.
Well, I think there is always an opportunity for big institutions to look at what the retail's doing. So let's be mindful of where the money comes from from institutions. So if you put together a pool of dollars and you give it to a large institution, they call it institutional money. That probably came from a subset of the teachers'
union of a lot of people. So everybody's got ten dollars and this all of a sudden, it's worth one hundred million dollars or a billion dollars, whatever the case is. So that retail money that's now big is now called institutional money. So their thought processes aren't too dissimilar from their clients. So yes, I can see that going back and forth, ebbing and flowing about the ideas of what they want to participate in or not. First of all,
I think people are always looking for opportunity. I think they're always looking for efficiencies. And I think that the lines of institutional and retail are absolutely blurred right now. And I think there's a lot of people going, what does that mean? I feel like I've got some kind of handle on that, and that's why I'm doing what
¶ Economic Justification for Event Markets
I'm doing, because I think that those blurred lines will continue to go forward, and the products that they participate in and how they do it will continue to get blurred. I think both can grow, and they'll grow exponentially, but they're going to look a lot alike.
I just have one last question, and I feel compelled to ask every CEO, or really every corporate executive this these days, with the exception of your software engineers who work at CME right now, is there anything that you can point to where large language models are being deployed in a productive way with in here or is it still at test and see and do experiments.
Okay, so let me see if I can answer that one, Jose, large language models being deployed, Yeah.
I'm sure the engineers are generating code.
Yeah, there's no question. But see, we're kind of in a bit of a limbo, for lack of a better term, spot right now because a lot of that stuff that I'm working on is going through Google right now. Because of the relationship and the partnership I have with Google. I'm transitioning. I'm going to transition my markets to Google Cloud. I'm transitioning a lot of my tech to Google Cloud, and a lot of that machine learning and things of that nature, Gemini and all that we're going through Google.
So we are doing it together, so it's not just my people doing anymore. It's CME and Google working together to deploy that. So I can't give you a singular answer what we're doing as CME because it's a mix between us.
At the moment. There's no workflow that exists where someone could point and say, you know what, this used to be a ten person job, but thanks to large language models, it's a one person job at least as of September twenty five to twenty twenty five.
The only way I can answer that is by headcount, and I would say that that is not the case because one of the things that I've seen with technology is it creates other jobs and it eliminates the last job. So yes, we have seen the elimination of certain things to your point, but it's created other ones. So I look at it as headcount, not so much as project related.
Spoken like a former pit trader who became the CEO of a very large derivatives exchange, can I squeeze in one more question. This is backward looking, but I am very interested in hearing about it. Liberation Day, huge amount of market volatility.
What was that like for you? You know, just another day, To be honest with you, I hate to say it that way, but we've seen so many different events in my career that you know, when you go back to the OAID crisis, you go back to the flash crash, you go back to other scenarios, the pandemic. You know, I look at the pandemic as one of the more the more frightening times in the history of markets versus Liberation Day. Liberation Day is more about whatether the terrorists
going to mean or not mean? And you know, I think there's a lot of people that believe that there's no way that these could come to fruition, So it was kind of tempered down a little bit. The activity was pretty exciting, but if that were to come out of the blue, it would be really bizarre. But I think that was fairly well telegraphed Tracy to say the least, Liberation Day, so I think the market was well prepared
for it. It reminds me a lot of last week with the FED that was the most telegraphed quarter point move in the history of the Federal Reserve. Right, is that fair? I think Liberation Day.
Moves in the stock market in a row.
Okay. So when you look at percent of stock market moves at the levels that we're at today versus the percent of the levels that we're at No. Eight, it's a non event. So if we had everything based non event, So I think it's relative to the value of the product and the percent goes with it.
What would worry you?
Now? Everything worries me, okay. So I don't have one particular thing. So you could say anything and I say, yep, that worries me. So, but I try to manage it and move forward. And I like to be, you know, telling my people a couple of different things. I love
¶ Institutional and Retail Convergence
looking for I love the future. I love young people. I think they're innovative. I think their opportunities galore are going forward. And I like to use my past as something that I learned from but not live in it. So I don't like to look through the review mirror. I like to look through the windshield and go forward. So but when you do that, you know there's a lot of things that can scare you. We talked about them earlier today. Some of the new innovations that are
coming out, some will win, some will fail. So you have to be very careful about how we participate in that as an institution, like seeing me, so that a lot of that concerns me. No different than when Sam was, you know, putting forth with FTX back in the day and he was backing up his coins with synthetic other coins, and then he wanted to have a margining system with no risk management that was fraught with danger. And I
saw that, but it seemed like nobody else did. I'm not suggesting that today's world, but there seems to be a situation right now with regulatory issues where you know, go ahead and do it and we'll apologize later. Is the old saying whatever it is. And that's not a good place to be. So that worries me a little bit.
Tracy, all right, Terry Duffy, always good chatting with you.
Thank you so much for.
Coming back on the show.
Thanks Racy, Thanks joeff.
It was a blast, Thank you, Thank you so much.
Fun Joe, Terry's a blast.
I love talking to Terry.
Yeah, I'm glad we did it though, because I think if you're thinking about the intersection of the sort of prediction betting markets and the sort of old school traditional markets, the CMME, you know, kind of stands out.
It's right there. I thought I really liked his point
¶ AI Deployment with Google Cloud
about twenty seventeen was by some by many measures, very late to the crypto game. Maybe. I mean, I guess we don't know in a one hundred years from now, maybe that'll still be seen this day one. But it's been a successful business for the CMEME, and so this idea that the long term, you know, one way to think about the long term failure creation the CME is that it's okay to be second that doesn't need to rush out of the gate for some of these things. I thought that was a very compelling example.
Right, and there you know, there is first mover advantage, but on the other hand, there is also institutional strength that can be an advantage as well.
F g exit first mover advantage. That's right, It sort of was missing the latter one that was proved to be very cost.
I think that was Terry's point.
Yeah, I don't want to be super old fashioned when it comes to a lot of betting markets. But one of the things you hear is that when you think about traditional financial assets, it's about putting money to good use, right you know, you invest in something, you're supposed to get an income stream back, or maybe an asset that appreciates over time, but again probably one that generates some sort of income.
I do.
I look at the activity on all of these betting platforms and like you know, market making platforms and things like that, and I just think there's so much money being generated and I'm not sure like where it's going.
Do you know what I mean?
Yeah, there's so much going on right now, and like it just feels like there's a complete blurring of everything, a complete transformation of everything. It really does feel like to me specifically, the doors are being flung open. There's this sort of growing norm in society that anyone can trade anything at any time for better or worse and make no judgment on it. I do think, you know, it is interesting to me one to see me specifically
¶ Future Market Risks and Regulation
this sort of like caution or you know, let's let's take this stuff seriously, not necessarily dismissing. On the other hand, like when seeing me like partners with fan Duel and
which is like a literal sports betting company. It strikes me that that is an accelerating event for this world where we just trade on everything that you could talk about caution, but like when you're like, you know, partnering with a straight up sports betting company, even if it's on a different app et cetera, that you're accelerating this world of everything is a bet on any app.
On the plus side, lots of content for loots, episodes and.
One other things.
Yes, and we have many more like this is like perfect time and this trip and everything. Because there's so much going on, there's that round table. I really like Terry's point about the even if you said it as kind of a joke about the lobster futures, Yeah, because I do think that's very telling.
Right.
You could imagine that lobstermen might like to hedge their prices, but that there's just not going to be in a volume or real market for it. And I do think that's interesting to keep in mind because I do look at some of these contracts that exist on the other platforms and like I could see a entity wanting to hedge out the risk of a very left tail jobs report or I could see you wanting to hedge out
the car sales risk of Tesla. The logic of the market does not necessarily mean that there will be a sizeable market. I think is a very important one to keep in mind.
But I also wonder if you wouldn't have the same market size issues for something like a lobster prediction market, like.
Who will well, yeah, we don't know.
No, no, no.
It just throws up all these really interesting questions, and I do think maybe we should start one and then talk about what we learned from it.
Let's do it, Okay, the.
Next aud Thoughts series. Shall we leave it there?
Let's leave it there.
This has been another episode of the Odd Thoughts podcast. I'm Tracy Aloway. You can follow me at Tracy Aloway and.
I'm Jill Wisenthal. You can follow me at the Stalwart. Follow our producers Carmen Rodriguez at Carmen Arma, Dashel Bennett at Dashbot, and kel Brooks at Kelbrooks. From our Odd Lots content, go to Bloomberg dot com slash odd Lots. We have a daily newsletter and all of our episodes. You can chat about all of these topics. Twenty four to seven in our discord discord do gg slash.
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