The appetite for event-driven trading is capturing mainstream finance at a breakneck pace.
Prediction markets seeing massive traction with global trading volume surging well past the $24 billion mark earlier this year.
Now CBOE is stepping in with CBOE predicts, which lets regular traders make simple yes or no bets on where the S&P 500.
Close it does build on the success of zero day options and it's launching just as half of all traditional exchanges are scrambling to jump into prediction markets.
Well joining us this morning to weigh in as JJ who is the head of retail expansion and alternative investment products at CBOJJ great to have you on the show.
Thank you so much for joining us now we all know.
That prediction markets, hey, well, prediction markets have been getting a lot of attention this year, and it's no surprise given all of the headlines that have been gracing news.
But given that CBO predicts where the S&P 500 will end on a day, give us an overview and explain this for us in layman terms here.
Certainly.
So, you know, we are going to start with the uh XSP which many refer to as the mini SPX.
So it's 1/10 the size of the S&P 500.
The reason we decided to start there is because if you look at predicts, you know, I've been in the business a long time.
And one of the things that I've seen with these markets is they are certainly retail driven, whereas so many other products seem to be institutionally driven.
These are 100%, in my opinion, retail driven, so do something that appeals to the retail investor.
And so we will have the simple yes no for the XSP again 11/10 the size of the S&P 500, which people understand pretty well, you know, uh, it, it, it, it goes, uh, will be $100 if you're correct, and whatever money you put up will be fully paid for up front.
But we're doing something really interesting here, I think also, Remy, and that is we are introducing people to the concept of vertical spreads and really what vertical spreads are simply buying.
One option selling another, we're gonna call it the plus zone and what it allows people to do is to buy a $1 vertical spread.
One of the things about options is you don't have to be 100% right to make money.
You can be directionally right and make some money, and that's really how professional options traders trade every day.
So we want to introduce people to that concept, vertical spreads being one of the things that's a building block of all options trades.
We thought.
Was a creative way to do so and one of the other things we're seeing is we don't see anybody making that connection between, uh, prediction markets and the markets that people truly trade and will continue to trade long term.
So why not sort of lay lay the, uh, I, I, I said we're almost like Hansel and Gretel laying the bread crumbs so that people start to understand how other products work.
The retail firms really like this because.
Again, we're giving them better longer term customers and the reason we're doing that is because one of the things I've found having been on the retail side of the business so long is that if people are trading vertical spreads they have a tendency to not really blow up their accounts and unfortunately we see too often people coming in too big.
This really is a way of disciplining people and as I said, professionals use this all the time.
They're very easy to understand and again it's a different.
Take on doing it.
The last thing I'll add is we're also doing this on products that are truly traded in the market, if you will.
S&P, we're not gonna do sports.
We're not gonna do the color of Taylor, uh, Taylor Swift's dress at an award ceremony.
We're doing things that market trades every day.
We're starting with the S&P 500.
We're gonna go to the Dow.
We're gonna go to the Russell.
We're gonna go to the Magnificent 10.
We're gonna go to Vicks.
So again, the products that people trade every day that relate to the market.
Yeah, and I'm glad you clarified those points, JJ.
So I do want to get your take, especially because you've been in this space for such a long time.
What do you think is really driving this appetite for more of the instant outcome trading over traditional long-term investing?
So I think that there's, you know, a, a, a little bit of a bifurcation here in terms of how people have to start thinking about things.
I've heard for so long younger people should take risk.
I actually believe younger people should take risk, and if you look at a lot of people doing this, they do tend to skew a little bit younger than the normal investor.
But yet when younger people take risks, we yell at them, Don't you take the risk.
That's dumb.
Well, one of the things that, you know, at CEO, if you think about it.
Options in a way have helped people have shorter time frames as you mentioned in the introduction zero DTE.
This is a natural extension of it.
Why?
Because if I said to you, Remy, what do you think the market's gonna do today as compared to what's the market gonna do in a month and a half, you certainly have a better idea, or at least, you know, good better thought process probably on what it's going to do today.
And I think the other thing that people should keep in mind is that many of the people who may be.
Doing this with some of their account.
I also have a 401k or an IRA, so it's not like they're not investing longer term.
They're just taking part of their portfolio and doing it in these types of products.
And the last thing about it is, again, thinking about it from a younger person's point of view, we all don't start out with a lot of money.
Most people struggle to get, you know, a few $1000 into an account.
Well, the nice thing about these products is they're very affordable, and we don't want people going in and spending a ton of money.
On things when they first start out, we like them to keep it to smaller amounts so that they can learn and get better at it, and these products don't take as much capital, so they are more appealing to not only people who are starting out, but because we're doing this and I'll call more real products, that is the S&P 500, the Dow, etc. they're going to appeal to institutions longer term too because it's gonna help them to hedge a lot of their bigger positions in a much more defined way.
And platforms out there when it comes to prediction markets such as Poly Market and Calci are constantly fighting regulators over the gambling label, especially on the state level.
But how big of an advantage is it for CBOE that these contracts that you just explained to us are fully cleared by the OCC and also protected by existing systems?
Well, you know, again, I, I, I see it as an extension of everything we've ever done.
It's a trusted name.
CEO's been around for, I believe it's 53 years now.
You know, I spent a lot of my career, early in my career down here trading in the pits, and we've evolved very well into the electronic world.
You have well-funded, deep markets and everything we do, you know, the SPX, S&P 500.
The Deepest market in the world and so with that you don't and you don't have to wonder, can I get filled the markets are tight and the other thing about it is you also don't have to wonder where it's going to settle.
We settle these every single day at a very known, uh, price that's broadcast worldwide.
It's always instant and you can actually see where everything's at in your position at all times.
And I do want to ask you about the competitive advantage here.
So how fast do you plan to expand into other high stakes areas including individual stocks or say major economic data releases?
And how does the CBOE also intend to protect its moat once the competition actually starts flooding in here?
Well, again, I think we have a first mover advantage.
We tend to expand pretty quickly.
So, uh, as we started these problems, some of the retail firms will, we, we, we've only got a small amount of retail firms on now.
A bunch of them are coming in over the next couple of weeks, uh, because of pattern day trading and the SpaceX IPO.
Quite honestly, and a lot of tech teams that were working on this and some of the retail firms had to go work on that.
I, of course, fully understand it.
It didn't mean we stopped working.
On it and so with that we expect a lot more volume in there and as soon as we start to get that, then we will pretty quickly start to expand into other areas overall and offering a much more full slate of products before year end, uh, you know, and, and so we're, we're pretty excited about where we're expanding overall.
We're also gonna come out with KPIs that will be, you know, the key indicators for the individual equities we just filed with the SEC the other day.
And so we expect, uh, you know, to be able to come up with those also after the filing period so we're very excited about all the things that are going on right now and that can help clients really.
Uh, go into ways that they sort of know, you know, if you look at something like Levi's, what happened, you, you reported that at the top of the hour, they absolutely beat on every single metric, but the problem was the forward looking statements weren't what they want.
It's very difficult for a retail trader who's like, OK, I understand the company's done really well, but you're down 6% because of a forward looking statement is very frustrating for people.
And finally, JJ, before I let you go, I do want to ask you about what you're paying attention to when it comes to options.
So in New York morning trade, we are counting down to the equity market open here.
We are looking at stock futures higher and we're keeping a close eye on geopolitics as well as oil prices.
And of course when it comes to the AI trade, Micron does stand out.
So tell us what you're paying attention to this morning.
Yeah, so the biggest thing I would say is that we're continuing to see this mentality of buy the depth.
And, you know, at some point to buy the depth I know is going to not work, but it's been working for about the past 10 years and you still see people continue to do that, you know, you just mentioned Micron.
That's one of the stocks over the last, uh, you know, particularly yesterday and a little bit the day before we saw people starting to buy some.
Upside calls on there because they expect the stock to bounce back overall, not have the problems they had.
I would say the other thing is if you look at yesterday and you watch the VIX, even though we opened down pretty big, we didn't really see any panic at all throughout the day.
You weren't seeing a real need to buy protection in the S&P 500.
It was probably the biggest surprising thing that I saw.
Yesterday is often when you have those big downward moves you'll see people coming in to buy protection.
In fact, we didn't see that at all, a little bit of the opposite as people looking for to buy the dip on these.
And by the way, that's one of the reasons that Zero DTE is appealing to people and over shorter time frame is that the premiums are so much smaller so they can take a smaller time frame without putting up quite as much money in their accounts.
Well, JJ, we will have to leave it there for today, but great talking to you.
Thank you so much for joining us this morning and thank you so much for sharing all of your insights.
