Interview with Tarek Mansour and Louana Lara Lopes from Kalshi

Horacio sat down with Tarek and Luana, co-founders of Kalshi. Kalshi is the only CFTC-approved event contract platform allowing users to make bets on real-world outcomes. Tarek and Luana are driving Kalshi to be a paradigm-shifting exchange for events on par with exchanges for stocks and commodities.

Discussion topics include:

  • Kalshi is an exchange that trades on events in the form of event contracts
  • Being the first event contract platform federally regulated by the Commodity Futures Trading Commission (CFTC)
  • The “Kalshi behavior” of thesis-driven investments on specific events
  • Roles as founding partners and their working dynamic
  • Determining the questions for the event contracts, including relevancy, volume, structure, expiration, and settlement sources
  • The yes and no proposition of the questions as the heart of the event contracts
  • Turnaround from the idea of a contract to putting it on the platform
  • People with greater interest in real events than traditional financial assets
  • Expanding Kalshi predictive markets into other events
  • The trading mechanics of each event contract
  • Surprising predictions from the Kalshi market
  • The importance of having clear rules for contract settlement
  • Kalshi’s future and fulfilling its mission

You can listen to the podcast through Spotify or YouTube.


[Horacio Ruiz]

Welcome back to the Alts podcast. I’m your host Horacio Ruiz. We bring you industry leaders and creators to give their insights on the rapidly changing and exciting world of alternative assets. Opinions expressed on this podcast by the host and podcast guests are for informational purposes only and should not be considered investment advice. Podcast hosts and guests may maintain positions in the offerings discussed in this podcast.

[Horacio Ruiz]

Welcome to the Alts podcast I’m Horacio Ruiz. And today’s guest are Kalshi co-founders Louana Lopes Lara and Tarek Mansour. Kalshi is a predictive market platform where users can make bets on real world events. Some questions you’ll find on the platform are, what will the high temperature be in New York city on Friday? Or will average gas prices be higher this week than last week? And again, you can place bets on that. Their goal is to bring Kalshi to the mainstream as in exchange. On par with the Dow Jones or the New York stock exchange. I hope you enjoy my conversation with Louana and Tarek. Okay. Tarek and Louana. Thank you for being here with us tonight to learn more about Kalshi. A really kind of cutting-edge platform, a prediction marketplace, could you tell us about what a prediction marketplace is and how Kalshi fits into that? 

[Tarek Mansour]

Yeah, totally. Well, thanks for having us. We’re excited to be here. So, a prediction market, or really what we usually call ourselves, we call ourselves Kalshi’s an exchange where people can trade on events. And so, the fundamental premise is the same way that you can trade on other asset classes like stocks or commodities or rates, or these days crypto. We’re creating an asset class called event contracts where people can trade directly on whether events are going to happen or not. So basically, you can buy yes and no shares on whether things like will Brexit happen, will it rain tomorrow or will COVID get worse next quarter. And the novelty about Kalshi is that we’re the first to get federally regulated by the CFTC to offer these types of event contracts.

[Horacio Ruiz]

  And that’s a big deal, right, to be regulated by the CFTC. Could you say that that gives you more legitimacy as a platform? 

[Tarek Mansour]

Yes. I mean absolutely. So, I think the way we thought about it when we usually, we’re considering and starting the company is, in the financial space, anyone can start an asset or website or anything like that to trade. But when we looked at it deeply, the CFTC, or which is the federal regulator for commodities. In the US, you have SCC that regulates equities and CFTC that regulates commodities derivatives and other things, has never really allowed this. And so, what we realise is that if we really wanted to build an exchange that has one day the potential to become, to build volume at the scale of a New York stock exchange or CME we needed to be regulated upfront. So that was not just a necessary, it was a critical part of our business. 

[Horacio Ruiz]

It had never been done before. Right. And that was a big hurdle. Because I, from my understanding, other companies had tried to do that, to get regulated with the event contracts and they weren’t able to do that. Could you tell me kind of how your process was different and what was it this time around for you guys where you got that approval? 

[Tarek Mansour]

Totally. So, here’s the way I usually describe it. Yes. A lot of people, a lot of institutions, this is not the first-time people think about this idea. If you’re in any trading circles or even really broader circles, this is like the holy grail of trading, being able to trade directly on events. A lot of people, businesses, institutions have considered this idea and tried to do it. And sometimes they approach regulators with it, and it’s been decades where the regulators have not really allowed it to exist. Luana and I have essentially spent the better part of two years and a half to even three years working on getting this exchange regulated and working with regulators and engaging with them at the CFTC, to essentially convince them to regulate us and allow us to be the first ever regulated exchange that allows trading on event. It was a very long road, took us three years. We described it as three years in hell. And I would say the number one differentiating factor, and it’s often a very sort of a not exciting, people love to hear about sort of the secret source or secret story, but really what it ended up boiling down to is we were the ones that didn’t give up for the longest. We had the most grit out of all people that have tried before.

[Louana Lara Lopes]

Yeah. And to add a bit to that, I think that it’s so different, I guess, looking at all our peers that also start companies, because usually start-ups launch a product and then iterate. Like we did the exact opposite. We had to think of every little thing, every little detail that could happen that could go wrong and build a solution for it before we even had a live product or a single user. Yeah. We essentially pretty much had to build the exchange itself, a broker, a surveillance system that complied with all the regulation and that would be willing to deal with millions of traders before even getting started.

 [Horacio Ruiz]

That seems like a lot of responsibility right. In terms of having to consider all these things. And I kind of, I want to jump into that. What I want to do is, you described it as three years in hell. Which is kind of funny, right. Because you’re kind of working on this kind of your baby, right. Your project, something that you really believe in. What was the impetus for creating this platform, this company, what was kind of like your motivation, right to begin it and then to see it through?

[Tarek Mansour]

 Yeah, absolutely. I mean I can start and what I can tell you. So, the way we think about it is when Louana and I both have worked extensively. We got into MIT, and we got into finance, and we worked extensively in finance. We also had something in [Inaudible 00:05:29] we’re really obsessed about sort of financial history and kind of the story and how the financial market got to where it was today. And at that time, we were observing what we call the cash behaviour everywhere. People loved just sort of speculating on future events like forecasting the future, will this happen, will Trump and Kim get out of North Korea with a deal. And then both of us started seeing it in our jobs. When I was at Goldman in 2016, I was working at this exotics desk. And one of the main things we’ve done in that summer is structured products for institutions that wanted to get exposure to or hedge themselves against Brexit. And these products were very complicated. It was a lot of different financial instruments. And the question of like, why is there no direct way of doing it? What’s popping in our heads.

[Louana Lara Lopes]

Right. Yeah. As Tarek mentioned, I think we are very similar on what we are, I guess, passionate about. And with me, it was similar. I saw this, what we call culture behaviour. A bridge water and a Citadel. Most of their investments are thesis driven investments on specific events. So, like what will happen with specific central banks? What will happen with rates and things like that? And they would trade based on it, but there was nowhere to do it directly. And what really Kalshi’s about is to bridging that gap. You have a conviction of have an opinion on an event and you should be able to have a trade on it directly and it should be accessible to everyone, not just the Bridgewaters and Citadels of the world. 

[Horacio Ruiz]

So, if I’m, I’m hearing it correctly, these other financial institutions are basically trading equities, right? Securities based on real time events, right. Events that can impact a security or some or a company let’s say one way or another. Whether it’s good or bad. So, they’re kind of indirectly trading. And then you thought, hey, why not – and I know it’s not the first time it’s been created, but you said, you thought there’s got to be a better way of actually trading directly into the events. Is that right?

[Tarek Mansour]

 Yes, that’s absolutely correct. I mean… 

[Louana Lara Lopes]

yeah. 

[Tarek Mansour]

…The way to think about it is whether you’re an institution or an individual, oftentimes when you’re doing active trading, how you do that is you first come up with an opinion about a future event. For example, I think COVID is going to get better this fall, and then you figure out, okay, how do I trade on this. Right. You might buy options or swaps, or you could buy a stock. For example, if you’re trading on Robinhood, you buy Marriot stock because COVID is get better than there’s more demand for hotels then you buy Marriot. But that’s very indirect because Marriot has a lot of other factors that impacts it. You might be right about your opinion, COVID could get better, but Marriot stock could still go down, because maybe, I don’t know, the CEO got fired. There’s been other issues. We allow people to come directly to Kashi and buy yes on will COVID get better. And that’s where the directness or kind of the elegance of this asset class comes from.

[Horacio Ruiz]

Okay. Awesome. So going on that, you guys, you graduated from MIT and then you’re working at two different financial institutions, and you’re kind of noticing an opportunity. Right. Did you guys keep in touch? And how did you decide then to leave your jobs to then start up a totally new company?

[Tarek Mansour]

Yeah, totally. So, I think we both got into MIT as internationals and so we were in that sort of circle. and then very closely realised, and that sort of helped us develop a strong bond is both of us were extremely intense people and pretty relentless. I would say that the thing that was common to both of us is we were not necessarily the mathematically smartest people at MIT. There were people that were extremely outlier. But we were the hardest working, I can say that safely. And one of the things that was interesting from our backgrounds before is both of us had to really work extremely hard to get into MIT. I did some [Inaudible 00:08:50] at the time I was a math nerd very early on, since I was 13, I made an obsession to get into MIT and quite literally work my arse off to get there. 


And Louana had another very interesting story. She was a professional ballerina at the Bolshoi ballet school. And what was crazy about her background is that she would do ballet essentially during the day and then would do her studies or text studies at night. And she managed with all of that to get into MIT know. Make this sort of switch to full on tech. So, both of these things required an incredible amount of intensity. And that was very clear to both of us when we met, we both had to go through quite a bit of pain and quite a bit of perfectionism needed to get where where we are. So, we met at MIT, and we had a very strong interest in math and finance. 


We took a lot of classes together, wrote a bunch of papers together. And when we we’re doing that, we realised that we had a very similar work ethic, but we were also complementary. Like Louana has always been sort of an extremely strong optimist. And there was always this kind of this idea that whatever it is, no matter how irrational, we’ll get it done. Whereas I’m a little bit more of, what’s the catch, or no fee launch, no fee launch is currently one of our values of the company type. I’m always thinking about where is our downside and sort of how to mitigate it. And so, these two forces ended up in some ways being very powerful sort of combination. And with the idea that as we described was coming to us and sort of really not leaving us. We realised the full-blown potential. We had the right team in both of us and we decided to go for it. 

[Horacio Ruiz]

How do you balance your roles? What are the roles that you play within the company? You noted Tarek the different kind of personalities that you have in terms of the outlook, what are the different responsibilities that each of you share in the company and where do they overlap as well? 

[Louana Lara Lopes]

We’re both founders. So, in the end, our jobs are kind of everything. But I’m mainly focused on markets and product nowadays. So, product as the classic definition of Silicon Valley, I guess, product. So, app, website, API design, all of those things and markets is actually our real product. So, the markets we’re offering how they work, how are they structured, how to build them, how to set the rules and how to operate them and all of those things. So that’s kind of what I focus on day to day. And Tarek is the CEO. So, he can tell a little bit more about his life. 

[Tarek Mansour]

Yeah. So, the way I think about it is like, empowering the team to sort of do their best job. So, I focus on liquidity building. So, an exchange, a big part of an exchange in basically building liquidity is figuring out how the dollars are going to flow through the system. So that’s a lot of my focus. Building the team and then in the seasons where it happens, fundraising. And then the rest of it is really sort of helping wherever is most needed. But that’s sort of how we see our roles playing out.


[Horacio Ruiz]

Yeah. Okay. So, let’s get into the liquidity. And I wonder if at the heart of a company like Kalshi, right. That the liquidity comes from obviously the users. And how do you attract the users and at the heart of what you do is basically you ask a question and it’s – the answer is either yes or no, based on the contract, which is simple and yet so complicated at the same time. My fascination is how are the questions developed? Right. So, it’s a two-part question. How are the questions developed? How are they kind of vetted? And then on the second part, what is the simplicity of that yes and no reply? Right. Was that purposely built? Did you go through different iterations of it and how did you decide on that simple yes or no?

[Louana Lara Lopes]

 That is a loaded question, but I’ll start from the first one. So, we pick contracts based on mainly user suggestions. So, most of our contracts in the platform are actually coming directly from user suggestions. And we also do complementary research to decide on the contracts that go in. And then we actually have an internal team that we call the market team, but they’re actually the two top debaters in the country. They are the actual international debate champions, that really their role is which markets should we invest in? Which markets should we put the time and the effort to bring forward? So that’s a lot of like just internal debate in the team. And what we are looking for are things obviously like, are these contracts relevant right now? Are they in the news? How much volume do you think they’re going to get? And also, really about the structure of them, like how the rules work, what would be the different strikes, expirations, which settlement sources would we have? How is the data? Is it reliable or not? So that’s really the contract formulation. And after we decide that we really want to do a contract, then it goes through a legal, I guess, process that they also do on writing pretty much, 40 to 60 I would say, page document for every single market outlining exactly how the contract works. So, seven or eight of those pages are actually on our website for each of the contracts we list. But most of the work goes into these confidential pages that explain how the market works, and manipulation concerns and things like that. Tarek do you want to take to talk about the rest of the questions? 

[Horacio Ruiz]

And just as a refresher, like I’m talking about liquidity, right. Like users are going to be drawn to interesting questions and also questions maybe that they can in some ways relate to. And also, kind of ease a participation. I don’t know how much of that is taken into consideration. Because if I imagine if you have these high kind of minded questions that people probably aren’t going to participate as much, but then you also want to have something, some stuff that sparks conversation, right. You have, like you mentioned these debate champions on your team, which must be cool because then that means that there’s got to be something worth debating, you know?

[Louana Lara Lopes]


Yeah. No, exactly. And I think I forgot the yes, no part of your question. But a lot of it is exactly that like we – event contracts they’re meant to be simple and they’re powerful because they are simple, and we can gather – so many people can have access to this and understand it so easily. And yeah. And sparking conversation is a big part of it. And I think the, yes, no question is really the natural form of these contracts. When you’re thinking about whether there will be hyperinflation this year, it’s really a yes, no proposition. Do you believe this is true? Or do you not believe that. So that is a natural format. We are experimenting with maybe adding other formats in the future. but the yes, no is really the heart of event contracts and talking about liquidity. It’s actually interesting how events are actually different from other asset classes because events begin, and they end. So, the starting up – it’s almost like we have a lot of mini-IPOs every day of like different events that we’re launching. And building liquidity is a challenge, but it’s also becomes a lot more, I guess a lot easier for small funds or small market makers or even individuals that want to provide liquidity to really have an edge and be able to do that on Kalshi and profit on spread. But I’ll let Tarek talk more about that.

[Tarek Mansour]

Yeah, totally. I mean, I think Louana addressed the question. With respect to liquidity the way we think about it is it works like an exchange, right. So, the way it works is similar to the New York stock exchange where people are trading against each other. And so, if let’s say I’m taking the yes of the equation, someone else is taking the no side and that’s how the matching engine works it matches the two. We can get into specific details. And so, the idea is getting more and more users on the exchange, but also what we call market makers, these market makers are essentially people that take the two sides, both yes, and no’s, and are always like basically staying on the exchange, coding the two sides and making money via the spread. Which is similar to how any type of exchanges work, whether it’s stocks exchange, other options, trading exchanges, commodities exchanges, or even crypto these days. But that’s really the idea.

[Louana Lara Lopes]

Yeah. And to add a little bit on what I said before about the news and the [Inaudible 00:16:14], I think another one of our big challenges is how fast can we actually put these contracts out. Right. Because news and the world moves so fast. So, Omicron, for example, it started in the news, and it was a major risk to everyone a couple days later. So, we are always like on a clock having to – we do this, we launched new contracts almost like every day. And like we are able to go from idea of a contract to it being on the platform in around two days, one to two days. So, it’s definitely super exciting.

[Horacio Ruiz]

Yeah. And you mentioned that a lot of the questions are sourced from just people on the platform or users. Are they just shooting you like DM’S on Twitter or sending you email? How do you source those?

[Louana Lara Lopes]

That’s a great question. So pretty much anyway, any user can communicate with us, we take suggestions. But we have a specific form on the website that you can submit suggestions. But also, any Twitter, just emailing support, kalshi.com, Twitter, DM’S, also mine Tareks twitter DMS. Yeah. Even sometimes they just tag us on Twitter, and it ends up being a market.

[Horacio Ruiz]

That’s awesome. And so, talking about the users, who do you find – I don’t know if you’ve done any market research on who it is that’s using the platform. Is it people that like you mentioned are market movers, right, that are using your exchange as kind of a hedging. Just like they would at a stock market or are they people that are kind of new to this idea of placing a bet. But it’s familiar because it’s not like a sporting thing, they’re actually betting on real life events. Like, are you onboarding new users to this kind of, let’s call it a prediction market, right. Or are you seeing that you’re having people that are just kind of transferring some of their money into another market that works something kind of similar to what they know?

[Tarek Mansour]

Yeah, totally. So, I think it’s both. I mean the way you see it is, one, this is an asset class that appeals to a very broad audience, whether it’s a small-scale investor trader, all the way up to the kind of big institutions and hedge funds. And obviously over time, we’ll go from smaller to bigger and bigger. I think the way to think about sort of the mix of the two today is there’s a lot of people that trade on traditional asset classes like stocks or options or other that are allocating a portion of their portfolio for this. Because it’s easier for them to develop an opinion, it’s easier money because you’re not trading against the citadels and the big hedge funds of the word, like you would in options trading. Obviously, you may be familiar with the whole thing that happened at Robinhood earlier this year. Well earlier last year, and obviously it’s regulated, it’s legit, its legit money, its legit traders, you know, ETC. But the other thing about events is that it’s also attracting a new breed of traders that have just zero interest in stocks. Definitely don’t understand rates. Options are too complicated, are not tangible. And you’re exactly right. What you debate at the dinner table is things like COVID or climate or geopolitical events or the weather, and you are less likely to debate like a financial specific company. Right. And so that’s an attractive thing to people that may not have been in to trading before, but now maybe are sort of getting interested in it and looking to get started on Kalshi.

[Horacio Ruiz]


And just from personal experience, right. Like in my household, for better or worse, like politics is a thing. Right. And I’m not going to get into politics on the podcast, but like debating who’s right. Who’s wrong. Right. And man, the passion, right, behind those arguments, those debates. You’d have relatives not talking to each other for months at the end of the day, But the joy came out of somebody kind of saying, I told you so, I told you so. And at the detriment maybe of the relationship sometimes, so I could see how this idea of totally not having any interest in trading anything, but then predicting important political events or economic events, whatever the case might be, has a certain attraction to it.

[Tarek Mansour]

Yeah, totally. I mean, I think the way we think about it is you’re absolutely right. People have actual opinions, they have actual stake in these types of topics like politics or climate, or weather, or COVID, whatever it is. But most of these traditional financial assets, and that’s really the power of our platform. I mean, the way we see it, I agree like humans crave to be right. They love to forecast the future. And the way we see it is like – one example of this is Twitter, right. Everybody’s making these predictions. And then a few months later they quote feed themselves to show that they made that prediction. What we’re saying today is like, okay, if you do have strong belief or conviction behind something, put your money where your mouth is, right. Like be truthful about it. Don’t just make cheap predictions that will go into thin air. Put money and have some stake in it. If you have that much conviction, which will allow for kind of a truth-seeking mechanism, right. You will know who to believe because the people that have put money behind their beliefs are probably more trustworthy and have probably higher conviction.

[Louana Lara Lopes]

Yeah. And actually, this is really the core at the core of the power of the predictive side of Kalshi, which is when you get all of these people of different opinions wanting to be right, they will do more research, they will bring more information to the market. And then you have the price of the market, really being the best forecaster for whether that event’s going to happen. If everyone has an opinion on whether a new COVID wave is going to start in the next month, and everyone does a lot of research because they want to be right and they want to profit out of it, you’re going to have a prediction that is a lot better than any expert. And that’s really the core of like wisdom of crowds or like the very academic side of prediction markets, which is fascinating. It’s really having this true source of information that can be used for forecasting.

[Horacio Ruiz]

Yeah, definitely. I didn’t even think about it that way. The power of a crowd of people having an opinion and kind of voicing that opinion. Right. Kind of moving a little bit forward with Kalshi. Any ideas into expanding into other areas. So, I’m a sports fan, and I know that that’s a big market. I live in New York State, and they just legalised online gambling here. So, I know that’s a big deal, but even like a simple, I don’t know, yes or no replies to sports and any thoughts on how that would also open up your markets. I’m just kind of curious, just because I’m a sports fan. Or is that an altogether different industry? That’s like not something that you want to touch, that’s got its own regulations.

[Louana Lara Lopes]

 
Right. So, we are not thinking of sports in the near future. We’re focused on more of the contracts that we have in the platform. So, things around COVID, economics, entertainment. So, we have things like the Grammys and we’re going to have the Oscars and markets like that. And we are looking into expanding also into more and more of the traditional, for example like stock indices or even FX and things [Inaudible 00:22:50] on also having binary events, but sports, not in the near future. 

[Horacio Ruiz]

Okay. Perfect. And I want to make one thing clear too. Like I think I read it somewhere while reading About Kalshi that you’re not like the house, right. You’re not like the casino where the term says the house always wins. You don’t benefit from people’s losses. Right. Could you do talk about that a little bit? Kind of like the structure.

[Louana Lara Lopes]


Yeah, of course. You’re totally right. Like, we don’t have any interest on the trades, on the outcome. You can think of Kalshi as a matching engine. We match the people who believe yes is going to happen, and the people who believe no it’s going to happen. And we get the best prices whenever they match. There is a trade. And we operate like any other financial exchange, like we have a central limit order book, different traders say the price they would like to buy the yes and the no at, and then those prices match. Yeah. So pretty much like any other stock bonds or any or commodities or anything out there in terms of how the order book works.

[Tarek Mansour]

So, I’ll add a little bit to this. The really important distinction when people look at sort of like the gaming or casino industry versus obviously the financial trading industry, in gaming and casino, like when a customer enters the casino, they essentially, they bet against the house. The revenues of the house are equal to the loss of their customers, which creates these kind of weird incentives. With us, and with places like the New York stock exchange or CME, or typical traditional financial exchanges, it’s what Louana said, people are essentially placing limits. And the exchangers job is to match these limit orders and people are trading against each other. And the business model for these exchanges is they take a trading fee; they take a transaction fee. And so, it creates a kind of completely different model. And the prices are formulated, like Louana said, by supplying demand. By where people are trading at what prices, the same with the price of an apple stock is determined by the public markets.

[Horacio Ruiz]

So each contract right, is a dollar. You can kind of correct me if there’s something that I’m not stating completely accurately. So, each contract is a dollar. And then as more people are kind of betting saying – there’s a question, will COVID cases rise over the next month. Let’s say. And so, as people are betting yes, more and more people are betting yes, the cost of that right, goes up. And then the payout becomes less, right. So, let’s say it’s overwhelming the number of people that say, yes, it’s going to increase over the next month. It’s going to cost you 99 cents per contract. And then the payout, if you’re right, is going to just be kind of a dollar. However, if by some chance you’re wrong, you lose your 99 cents for that one person, and to that person that bet 1 cent on no. And you can buy as many of these contracts as you’re allowed. Is that correct?

[Tarek Mansour]

 Yeah. So, the payout mechanics are correct. The price formation mechanics, I’ll sort of elaborate a bit. So, it’s not just just about the number of people trading. So, the way it works is trader A, let’s say Tarek and Louana trading on the exchange. I come in and say I want to trade on, let’s say question like, will COVID hit 1.5 million daily cases? Will we have 1.5 million daily COVID cases in a day. Right. And I think, yes. What each one of these contracts will pay out is $1 if it does happen zero if not. And the no is the opposite. And the way I would say, it’s like, let’s say I want to buy a hundred shares and I want to buy them at price. Maybe I think that there’s a 40% chance. So, a price 40 cents. So that’s what the limit order is. I’m going to place it on the order book, right. And now if someone else, maybe Louana wants to buy no. Her no shares will get matched with the yes shares if she buys at 60 cents. And then this is where we have a trade, right. So, let’s say I managed to buy from different traders, a hundred shares at price 40 cents. I’m going to pay $40 if I end up being in the money. If the event happens, I’ll gain a hundred dollars with a net profit of $60 right. Now obviously if a lot of people think that the probability is higher and higher, a lot of people might be willing to buy at higher prices like 40. Maybe it goes to 60, maybe 70, maybe all the way to 99. Because people are pricing them at orders at higher and higher prices, because they think the probability is higher. If you think the probability is 99%, you’re willing to buy at a price all the way up to 99%.

[Horacio Ruiz]

I see. So, you’re basically just matching somebody’s offer.

[Tarek Mansour]

Correct.

[Horacio Ruiz]

Any surprises, like any questions where you put out there and it could go 50-50, and then you kind of started seeing overwhelmingly that it went in an opposite direction or anything that is surprising you so far with the data? Whether it’s a specific question or a specific category. 

[Louana Lara Lopes]

Yeah. I think my biggest surprise so far was really how well our markets predicted the Omicron wave. We had some markets for some time, [Inaudible 00:27:17] whether a variant of – I think high consequence would emerge or like if the percentage split between Delta and another variant. So, the question was pretty much will another variant pick up. And by early December we saw like a wave of traders really going and taking the side that Omicron would be a huge wave. It would be the dominant variant. And there would be like an insane amount of caseload, cases by the new year. And at the time we were in the office, we were like, wow, that’s crazy. No way. Like, they’re thinking more than like 600-700,000 of cases by the new year. That’s crazy. We thought they were crazy misprices. And the market was completely right. Like it was, I mean, the media was saying how contagious this was. But obviously like it was in another proportion. So, it surprised us all. But I think that that’s really the power of our markets. But one that we are watching very closely right now is actually the fed rate for the March FOMC meeting. Because traders are predicting that there’s only right now a 3% chance that it’s trading at 3 cents. But there’s a half a point hike in the March meeting, even though the news – there’s a lot of news right now saying that it’s a real possibility. So, we are really trying to see who is right now, the media or the Kalshi markets I would definitely bet that the markets are right, but we’ll have to wait and see. 

[Horacio Ruiz]

Yeah. And correct me if I’m wrong, I’m not totally ingrained in the news, but they’ve given suggestions right, or hints that they are going to raise the race, or at least that’s what the media’s reporting. Right. 

[Louana Lara Lopes]

Yeah. So, I think the market is pretty confident that they will raise rates. We actually have markets for every FOMC meetings. So, you can really get the type of exposure and opinion that you have on how that rate hike is going to happen. But the market doesn’t think that it will be like a 0.5. So, the market doesn’t think it’s going to be a base of .75 in the March meeting. They think it’d probably be less. So, I think the real conversation there is like how big of an increase it’s going to be in the March meeting.

[Horacio Ruiz]

Yeah. Any other questions that are kind of like – I really like the weather questions, like will the high and New York City reach 40 degrees, right. Or whatever the case might be. And I wonder what – because you do stress on your website, you have to read the contracting, terms of the contract. And it’s kind of – so I went in, and I was like, okay, so New York City is five boroughs. Right. But the contract was very specific. It was about the high temperature taken from Central Park. And there were a couple of other stipulations. So that makes a little bit different, right. Because a lot of times the recorded temperature in Central Park is a lot different than the temperature in Brooklyn or the Bronx or wherever the case might be. So, I’m kind of interested in those details of the contract and even how something like the weather, right. Just predicting the high comes with its own little backstory.

[Louana Lara Lopes]

Yeah. And every one of our contracts is a legal document. So, it is our job to make sure that things are going to be determined in a fair and right way. And that really means going very deep into the rules to know exactly which like geographical location we’re going to use to settle, and which website do we trust. And all of these things are like a process that the team goes through to make sure that the contracts are not going to be like indeterminant, or like have any questions on whether it’s a yes or a no, our contracts are really clear or a yes or a no. And the rules really make that evident to the traders. So that’s why it is really important to read the rules. Obviously, we have the titles. they are a great summary of what the market is about, what the rules have like all the details of what could happen. And especially for contracts, for example, closures to Supreme court decisions, which we have contracts on, or specific bills passing. Like we had infrastructure bill or a reconciliation bill passing. It is important to read the rules to make sure that there are no surprises or caveats, but obviously most of the contracts, you can just read the title and understand exactly what it is, but it’s always important to read the rules.

 
[Horacio Ruiz]

Yeah. And I kind of want to go on that question. I think my favourite question right now, there’s a lot of interesting questions there is – and it’s kind of a hot topic, is will there be a new Supreme court justice in 2022? And that’s such a simple yes or no, but it’s such a loaded question. And it is just kind of fun. Right. Because there’s so much that’s involved right. Politics, people’s beliefs, things like that. 

[Louana Lara Lopes]

So, I mean the Supreme court, if a new justice confirmed that impacts actually the life of every single American. So being able to understand the chances of things happening and hedging that is so important and yeah. And the market for the Supreme court is actually very uncertain. I mean it is almost 50-50 on the market. Things that a new justice will be confirmed. So, we have to wait and see as well,

[Horacio Ruiz]

Any other categories that are down the pipe that you’re kind of really excited about. Any other, even questions that you’re kind of curious to see, to roll out over the year?

[Tarek Mansour]

Yeah, absolutely. I mean, the way we think about it is we’re always monitoring the things that are like most in the news, most trending, most on top of people’s minds. And those are the things that we always try to sort of list dynamically and quickly. So, the one thing I would say is there’s going to be events that we don’t even know of their existence today that we’re always going to be listing and expanding into. But more generally speaking, we’re always expanding the universe of things that people can trade on. And we’re doing that incrementally over time. More things around politics, more things around climate, more things around economic indicators and financials and financial events. More things in the entertainment industry and other. But yeah, that’s what we got for now.

[Horacio Ruiz]

Yeah. Now already you have a huge amount of offerings. I kind of want to take a big picture view of your company to kind of have the last part of the podcast and big news a couple months ago, you guys got a series of funding for 30 million. And I mentioned that because you must have people that believe in you, right. That believe in the model, if you’re going to have a group of investors to give that amount of money, how significant is that fundraising, that amount of money and what it does for you moving forward?

[Tarek Mansour]

Yeah. I mean, that’s great. So, I mean, I’ll answer the fundraising question and I’ll answer the sort of longer-term vision question, but we’ve raised a few rounds so far. A lot of people believe in us and the long-term vision, the way we view fundraising is that at the end of the day, it’s one, a way to get money, fuel to basically allow us to get where we want to get. And then two bring in hopefully the right people on board that will help us advise us, navigate the waters that any start-ups that you know are truly trying to be ground-breaking will always inevitably have to navigate. I think people believe in us and the long-term vision because I would say one is the scale of the ambition.
We have a bold long-term vision. Kalshi is one of those companies that could truly sort of be paradigm shifting and truly impact the financial market to its score. When you really think about it, fundamentally, there is no reason today why events are not as traded as stocks, commodities, or all these other things that have massive trading volume today. Right. If you look at the interest rate swaps market, it’s a 500 trillion-dollar market yearly. And that’s for an asset class that barely anyone even knows about. You’re talking about events here. The things that really are the most tangible to people or institutions worldwide. So, there’s truly the sort of the size of the opportunity here is truly tremendous. And I think we’ve built the right team to get us there. You know, when you think about the future, you know what this could look like in 10 years. We usually visualise or imagine a future where essentially every time someone has an opinion about a future event, the first reflex they have is to buy event contracts, right. Either because they have an opinion, they want to get exposure to that event, or because they want to hedge their risk with respect to that event. And I think that would be a very powerful world to live in. 

[Horacio Ruiz]

And I want to clarify something too, because you mention the stock market. That’s all you can do. Right. You could just basically say yes or no, right. Put your money down in one of those two options, would there ever be a situation where people can be shorting or longing a prediction? I don’t know, trading on derivatives, like they doing the stock market because, a lot of times from the outside looking in that seems to me like it makes the gains fantastic. Maybe sometimes too fantastic. And it makes the loss is a little too dramatic as well. When you have these players that are kind of manipulating the market. Is that something that concerns you moving forward as you develop a marketplace?

[Tarek Mansour]

Yeah, totally. I mean over time we will potentially look into things that are like linear, not necessarily yes, no, but you just trade in like a climate. And how it’s going to – and you get paid linearly based on where it’s going to land or COVID cases or other things. So that’s definitely something we’re considering. With respect to market manipulation question. I mean, I think look, manipulation is a risk for any type of market, right. And any market anywhere, there’s always bad actors that try to manipulate or threaten market integrity. And for us, like in the New York stock exchange, our CME, we have a comprehensive surveillance program where we have basically algorithms that are running statistical models that are flagging any suspicious or unusual behaviours.


And then these get investigated by our compliance team. And there could be heavy sanctions for people that do it. The same way that there’s heavy sanctions for people that do insider trading on stocks. Our markets are a little bit harder to manipulate in terms of price because for a stock option, if you move the price in a certain direction for long enough, you could influence the outcome of the option. Whereas here for something like will Brexit happen, people could theoretically move the price as much as they want, but at the end of the day, there’s a true probability Brexit will end up happening or not. So, when someone tries to manipulate the price, let’s say by moving it up, traders are smart. Arbitragers will basically bring it quickly back down because they’ll see the opportunity. They’ll see that someone moves the price from let’s say 40% to 60% and they’ll be like, oh there’s a 20% difference of spread that we can take very immediately. And they’ll take it and bring the price back to 40%.

[Horacio Ruiz]

Awesome. Going on with the theme of the company. You mentioned that the three years developing was difficult. Right. And so now you’ve had some success. You’ve described yourselves before, you guys have a strong work ethic. What are the challenges now for both of you running your company. And if I say so myself, like, if I can say this and I say this in the best way possible, you’re both young. You’re both young and you’ve been able to build up a company. What are some things that you’ve learned? What are some challenges that you didn’t see coming up as you were developing this? Where good things have happened, but then you’re like, we still have a few more things to do here.

[Louana Lara Lopes] 

Yeah. I mean, we still have so many things to do here. For us, we didn’t know any of the challenges going in. I think we didn’t have any idea of the regulatory space, or if it was CFTC, what is SCC. What are different things. And we kind of just took it a challenge at a time. And for us in the beginning, when we were trying to understand the landscape, we’re like, okay, let’s call 60 lawyers in a day. Try to get one to explain to us this entire situation. Everyone thought that we were crazy. And it’s just about going one step at a time into the challenges and what’s coming next. I think for us now, I think it’s really about – we are in the process of learning as much as we can from the users and what they like to trade on. What works, what has liquidity, what are the markets that work the best. And then really scaling this. I think building an exchange is very hard because as you mentioned before. There’s a liquidity piece and there’s all these other pieces that have come together at the same time with the new users. For the exchange pickup. So, putting all those pieces together and really aiming for the volumes that like – the likes of CME and the New York stock exchange has is going to be a long and very, very hard process. I think that the next couple of years will likely be harder than the regulatory piece in terms of building this exchange from scratch.

[Tarek Mansour]

Totally align there. I think there is a certain naivety that comes with being younger, I think. That is quite a powerful driving force. I think not knowing how crazy the mountain to climb is, is a part of positive thing counter-intuitively because it’s a little bit like I would say when you’re like hiking, very common advice is to tell you not to look up, and not to look at the whole road because of how long the road is going to be. So, it’s really about beating challenge after the other. And I think for us one other thing that again, I think unites us as founders and the team that we’ve built around us as well, is we really do not take no for an answer. I mean we’ll just push no matter what. No matter what challenge comes our way. And the regulatory piece has been very strong evidence of that. So, we’re quite excited about what the future holds. We’re going to keep pushing until we make this. Until we made event contracts pretty much like a very boring, commonplace utility.

[Horacio Ruiz]

Going on in that question, what is your day to day now? You mentioned before you guys don’t get any – you guys are going 24-7, but I’m sure when you wake up and you’re like, hey, I got my own company and I’m a founder. That motivation is there to keep going. What is your day to day like? I mean, you guys are in meetings, you’re developing the company, conducting interviews, it doesn’t end. Huh?

[Tarek Mansour]

Yeah. I mean the day today is quite intense. I mean, going practically what it looks like, obviously a lot of building, a lot of learning, talking to users, iterating, setting direction, obviously recruiting and scaling the team. We’re always looking for a best talent out there. So that’s really the – very long days right off. I would say that the more, maybe quite philosophical or meta answer to this is, this is sort of the thing about building sort of a high growth, high ambition start-up is that you’re in this constant balance between long term vision, really constantly getting reminded of what you’re building towards and why you’re sort of doing the day to day and maybe short-term execution. Right. And the way to think about it’s like you’re rowing this boat towards something that is very long term, very long-term horizon, that looks amazing. But at the end of the day, you have to row the boat. And rowing the boat is quite tough. It’s quite exhausting at the day to day. It takes a lot of resistance. It’s a marathon, but you’re running this marathon and you’re motivated to run it because you know that you’re running towards something very meaningful. So, I’d say that’s how it feels like.

[Louana Lara Lopes] 

Yeah, that’s true. And also – but honestly my day to day has gotten a lot better since we went back to the office. I think that just the energy of the team and everyone working on different things and like having lunch, or even just going to get tea together is very exciting. So, it’s definitely, I think going back to normal after COVID has been great for the company and for everyone. But yeah, it’s wake up shower, go to work, come back, sleep and restart kind of every day of the week. But it’s awesome.

[Horacio Ruiz]

Yeah. Well, thank you for spending an hour with me here. Talking about the company. It’s been really great learning more about you guys. Learning about the company and the mechanics behind it and I’m sure you guys have some great things ahead. So, thank you guys so much.

[Tarek Mansour]

Thanks a lot. Thank a lot for having us. 

[Louana Lara Lopes]  

Thank you so much. This was awesome. Thank you.

[Horacio Ruiz]

It’s always great to learn about a platform that brings something different to the table. And Kalshi certainly fits that criteria. Tarek and Luana have a passion for the history of finance, and it’ll be great to see them leave their mark on the financial markets. If you enjoyed today’s podcast, let others know about it. We find our guests to be so interesting and knowledgeable. And I know others will too. Or leave a review or hit the follow button.

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Author

Horacio Ruiz

Horacio Ruiz

Horacio is a veteran math teacher of the New York City public school system. Prior to teaching, he lived in New Orleans where he worked in sales for the New Orleans Hornets before joining The Institute for Sport and Social Justice to rebuild homes in the Lower Ninth Ward and neighboring St. Bernard Parish. He currently lives in Staten Island with his wife, Alicia, his three sons; Oliver, Henry, and Jacob, and their pitt-mi,x Tipitina. In 2019, Horacio published a biography, The White Knight: Calvin Patterson and the Integration of Florida State University Football.

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