Trey Lockerbie (00:03:18):
And you offer way more than that. I mean, I’m seeing things like Chicago high temperature on June 7th, moon landing before 2025. You have Seattle, rain today or not. I mean, you have all kinds of events, not just what people might typically think of as a economic events. So before we dig in more on that, you covered something there I want to really highlight, which was the CFTC regulation. So this is a big deal. I mean, this is a really big deal. And I think that’s important to not just brush over, because you spent a lot of time achieving this. And so, first of all, for those who don’t know, walk us through what the CFTC is and what it does, and why everyone before you has failed to do this.

Luana Lara (00:04:03):
That is a great question. The CFTC is the Commodity Futures Trading Commission. So they are the US … the federal regulator for derivatives markets. The same way that the SEC regulates securities trading, the CFTC regulates derivatives commodities like grain futures, and things of the sort. And under the regulation, under the laws, events are considered commodities. So the types of contracts we offer, event contracts, are technically derivatives on commodities under the law, so it means we’re regulated over the CFTC. So the CFTC regulates our markets.

Luana Lara (00:04:35):
Historically, yes, people have not been able to do what we are doing now. And I think the answer is a lot, I guess, unsexier than people think it is. I think that it was really about grit and patience. We wanted to do things the right way, because we really saw this as the only way to see event contracts really reach its full potential and become a mainstream asset class like stocks and now crypto and things like that. And for us, we needed to do it the right way and do it regulated, because that’s the way you get real money into the system, you get brokers, market makers and institutions and things of the sort.

Luana Lara (00:05:09):
So we really saw this as the only way to bring our mission at Kalshi to reality. And we went through with it. It took us two and a half years to get regulated and to be able to launch and get our markets through. And I think the people that tried to do this before, they tried to move fast and break things and not do these things the right way and have customer protection the right way and regulation, and they ended up failing. And for us, we just really had the grit of working it through, but it was definitely a very, very hard path.

Luana Lara (00:05:36):
My co-founder loves to say that it’s like you’re climbing a mountain and you think you’re getting close to the top, and then you realize a mountain is twice as tall, and you keep going, and it just keeps doubling and doubling, because we pretty much had to work through all the concerns the regulators had with all the regulation around it, to things like manipulation and gaming and the hedging utility and how these markets would actually work to be able to launch them. But now, we really got the setup that allows us to try to get event contracts, to be a mainstream asset class and really reach its full potential. So looking back, definitely the extremely … the right to decision to go through this part, for the regulated path.

Trey Lockerbie (00:06:17):
Well, that’s why they call it sweat equity, right? So what you just described there with the mountain brings up maybe another metaphor that I’ve thrown out there before. You, I don’t know, called 60-somethings attorneys to figure out how to do this. And all of them were like, “You’re crazy. Go away.” For me, what I’m curious about is how much you knew this was going to be an uphill battle and how much you could expect it might take years to achieve. And my analogy or metaphor was essentially going on a 20-minute car ride that turns into a three-hour car ride. Those are the worst because you’re sitting in traffic for hours. And had you known it was a three-hour drive, you’d probably be totally cool. But I’m curious if that’s what it was like, not knowing it would take so long, or did you have a pretty good idea, just from all the counsel you took on early on?

Luana Lara (00:07:02):
Yeah. So as background, I’m not a lawyer at all, probably the opposite of that. I was a computer science and math major in college, and so is my co-founder. We didn’t really know the regulatory landscape at all, but we did, from the beginning, understand the regulation was the key piece to getting this to work out. Both, I guess, me and my co-founder, we are very motivated and a little paranoid people. So we’re like, “We need to get the best council we can. How are we going to understand this? We know nothing about the law, nothing about finance regulation.”

Luana Lara (00:07:32):
So we started calling a ton of lawyers. And all of them, one after the other … it was 65 lawyers in a day telling us that it wouldn’t work, the CFTC had said no to this before, you can’t prove certain core principles, which is how the CFTC regulates things. But we kept going and kept pushing because we really believed in how good these contracts can be and how good prediction markets can be. And we ended up finding one lawyer that had worked with the CFTC before, Jeff Beman, and he really started working with us and started helping us understand the whole thing.

Luana Lara (00:08:04):
I think people usually think it was just a bunch of lawyers, and Tarek and I were like … Tarek’s my co-founder … more hands off, but not at all. We were the ones reading regulation, doing analysis, writing memos, and doing a lot of things to get this through. But yeah, we did not know it was going to be this hard. I think we thought in the beginning we would be able to get it done in around six months. It ended up being five times that, but yeah, looking back would definitely not change that. I think obviously, if we were lawyers, we’d probably have understood it a little bit better, the amount of time, but also we’d probably not have done it. So I think it was the right setup. We were naive even the right way.

Trey Lockerbie (00:08:41):
What were some of the early wins over those two and a half years that kept you going? Because I’m sure at some point it felt indefinite, right, like, “How long is this really going to drag on?” And especially with regulatory things, it was just unknown and uncertain and undefined. So what were some early wins that kept the momentum going?

Luana Lara (00:08:59):
That is a great question. I think for us, a lot of the early wins were about just moving a step forward with the regulators. So they would have, for example, a list of concerns. We would work through the list of concerns, talk to them, and then they would come out with another list of concerns. And for us, if the second list of concerns came and they were indicating progress and that we were going the right direction and we were convincing them what we were saying, versus just like, “No, this is not a something we’re willing to understand or work on further,” it was something that gave us the indication that we keep going.

Luana Lara (00:09:37):
I think both of us are very stubborn people. And if we get a no or somewhat of an indication of a no, that we don’t really understand why it is a no, or it doesn’t really sound like a no, and you don’t really understand why, we would keep pushing. I think internally, we would say, “Unless the CFTC tells us, ‘Do not come to talk to us again. We never want to see you again in front of us, and we’re never going to let you do it,’ we’re going to keep trying.” And for us, it was really counting the tiny wins. It’s like, “Oh, this one question out of this huge list has gone away, so it means we’re making progress and we’re going the right direction.” Looking back, it was a little crazy for us to do that and keep pushing, but definitely what got us here.

Trey Lockerbie (00:10:20):
Were you building along the way, I mean, throughout? Were you building the platform, or did that seem futile, just not knowing the future and whether you should spend your time on such a thing or not?

Luana Lara (00:10:30):
So we had to build it, because a lot of the process is actually proving to the CFTC that you can build the exchange and you can build the surveillance systems and you can build your customer support or your operations of the company. And that was pretty much a strong part of the application. And to start a new asset class from scratch, even things like surveillance that I think a lot of people take for granted in an exchange, because most exchanges actually use off-the-shelf solutions, for us, we needed to build from scratch, because there are no surveillance for event contracts out there. There are no policies and procedures around this that you can just buy.

Luana Lara (00:11:04):
I think there’s a lot for options and other things like that, but for us, everything we needed to build from scratch. And the regulators wanted to know that we could build everything, we could build the systems, we could build the exchange, we could build the infrastructure. Funnily enough, it was before the pandemic started, it was 2019, and we already had to do our business continuity plan that included a pandemic planning and things like that. So when we got regulated, we got ready to launch, we had everything ready because the CFTC checks every single thing that you’re doing.

Trey Lockerbie (00:11:35):
Can you define surveillance as you’re describing it here? What do you mean by that, exactly?

Luana Lara (00:11:41):
Right. Surveillance means looking at the activity in the exchange and trying to see if there’s anything suspicious or some bad activity happening. So in the world of securities, for example, you could think about surveillance catching insider trading and things like that. In the world of the CFTC, you can think about things like, I don’t know, wash trading or collusion and things like that. And what we need to do is to ensure our markets are safe and integral. And surveillance is a big part of this, because we need to look at all the data and make sure that no bad things are happening. And if there’s some indication they’re happening, talk to them, kick out compliance procedures and things like that. But really, the goal of surveillance is to make sure everyone’s trading on safe markets.

Trey Lockerbie (00:12:24):
Now that you’ve done this and it took two and a half years and you’ve built this model, in one way, you could look at this and say, “Wow, you guys are way ahead of the pack now because you’ve just put in all this groundwork and you’ve gotten the approval.” On the other hand, you’ve created the playbook and you’ve proven this concept, if you will. So does that mean, I mean, any of these bigger institutions could come out and just replicate, or is the competition harder to come by?

Luana Lara (00:12:51):
Right. So we can think about competition in two different ways. I think you can think about startups in a way, or companies trying to get regulated as an exchange, and going from there, and then the bigger players. I think for startups, it’s not that CFTC has a list of rules and you need to meet all the rules and you’re automatically approved. The CFTC is a principles-based regulator. And you’re going to need to work with them and make sure you prove to them that you can comply with all the regulations, all the core principles, which is what they call the principles, and the basis they have for regulation. And it’s a very time consuming, very hard process for every exchange. That is why there’s only, I think, 16 exchanges like this in the US.

Luana Lara (00:13:29):
On the bigger company scale, I think it is obviously they don’t … CME, the Chicago Mercantile Exchange, the biggest derivatives exchange in the US, if they want to come into the space, they don’t need to re- get regulated. But I think what really sets us apart there is how much we know the market, how fast we are at creating these markets. I think usually exchanges take around two years to create a new contract, for us, it takes around a day to create a new contract, and really have the setup. We are direct-to-consumer. You don’t need a broker to access us, and all of these things that make, I think, our value prop a lot stronger. And again, they also need to work with the CFTC to get the contracts through. Every contract, you need to work with the CFTC to get it through.

Luana Lara (00:14:09):
But in general, the way that we think about competitors is that we want competitors to come in to really help grow the space. We say that for Kalshi to be as big as it can be and as successful as it can be, we need event contracts to be successful first, and then we have to win in the space. But event contracts need to win first. So if we have more and more people coming in and helping push the space forward, that’s actually very good for making event contracts mainstream and reaching our goal. And then we’re very, very excited to compete with people and actually being the winner exchange in the space. But a competition will be good to really make the pie grow.

Trey Lockerbie (00:14:48):
So creating those contracts in a day, as you just mentioned, I mean, from my limited framework, what I’m hearing you talk about is product development, right?

Luana Lara (00:14:57):
Exactly.

Trey Lockerbie (00:14:57):
And given the wide range of products on this site, meaning markets or however you want to describe it, what does the process look like to qualify a product to bring to market, if you will? So for example, Seattle rain, let’s say. So are you guys batting things around like that over a conference table and saying, “I think that would be a good market,” and then someone says, “Okay, let’s try it”? How does that work? How do you come up with these?

Luana Lara (00:15:23):
The way it starts is I guess the simplest way for product development to start, which is user requests and user feedback of, “We want to trade on this market. We think this market will be big,” or a lot of just internal research. But 90% of our markets come from user requests. And then we do sit down at a table and debate whether … Actually, our markets team are US debate champions. They were Yale debate clubs champions in the United States, or something. So really, exactly sitting down and debating whether we think the contracts can indeed be that good and can be compliant and all those things.

Luana Lara (00:15:58):
And if it passes the initial discussion, then it goes through a compliance process on making sure the markets are not easy to manipulate, making sure there is economic purpose and hedging utility, making sure the rules are clear and we have a good oracle, and if we need data partnerships and licenses, they are in place, and all of those things that for all the exchanges takes around two years. For us, it’s just that we’ve gotten amazing at this operation for the past two years, so nowadays we’re able to do it very fast.

Luana Lara (00:16:26):
But in general, this entire compliance procedure for most exchanges takes around … for most exchanges, product iteration like this takes around one to two years, if you look around Bitcoin futures when they started, and things like that. For us, because we just worked so hard on the operations, and we really … This is our product. As you said, our product is not the interface, it’s not the API, it’s not the app. Our product are the markets. And we take this to core, really bring product development procedures into market. And we were able to work on this, really operations, for the past two years. And nowadays, we are able to get it to very fast. But other exchanges take a lot longer.

Trey Lockerbie (00:17:04):
All right. So now I want to talk about how this works, and then more importantly, why people should care or be interested in such a thing. So as you mentioned earlier, there’s two sides to this trade, either you’re saying yes or you’re no, and it’s something binary. The outcome has to be something seemingly quantitative and binary. And you said it’s basically one cent to a dollar. I’m not that good at math. But what I’m seeing here is some of these are going from the yes is 95 cents, the no is 8 cents. So it looks it’s trading even though or it goes a little bit over a dollar in some instances. What is causing that? Is a dollar sort of a rough range? Or walk us through the pricing, how this works, what the odds are involved, and everything you think of on the mechanics.

Luana Lara (00:17:45):
Yeah, of course. So I guess I’ll start by the prices. So the prices go zero to one. And the mechanics is that if you are buying one side, let’s say yes at 60 cents, it means there’s someone buying the no at 40 cents. So whenever the numbers sum to $1, the trade is executed, because it means that you guys agree on a price and it’s going to match. However, the prices that you see on the website, they are the prices that you can buy at the moment, so they weren’t executed yet. So basically, you can think about it as people saying, “I would like to buy at this price,” but no one is really going there and matching it. So let’s say a 95, 8 market. It means you can buy a yes … If the yes price on the website says 95 cents, it means you can buy a yes right now for 95 cents, which means there’s someone trying to buy the no for 5 cents. On the other side, there’s a no that you can buy for 8 cents, which means there’s someone trying to buy the yes for 92 cents.

Luana Lara (00:18:43):
So if you’re willing to buy the yes for 95 cents, you are going to have a trade with the person that tried to buy it at five cents. It’s a central limit order book, like any other exchange. So basically, people say the prices they would like to buy it. And whenever the prices sum to one, a trade executes. So the prices you see on the website are the ones that haven’t executed because people are not willing to take the other side at the moment, but they’re resting there waiting for someone to want to take it.

Trey Lockerbie (00:19:14):
Okay. So how long are these products listed? Is it up until the date of the event, or is there … once we’ve locked in certain amount of trades, it closes out and you’re locked in?

Luana Lara (00:19:29):
No, it goes up until the close date or the expiration, the close date that’s stated on the market. So for example, the moon landing market driver is, “Will we land on the moon by 2025?” This market’s open up until we land on the moon, or the earliest of us landing on the moon or the end of 2025. And at that point, the market’s closed and we wait for settlement, and that’s when who is right or who’s wrong is determined. Before that, you can trade between, the same way you trade the sock. So you can, for example, buy a yes for 40 cents, sell it for 60, buy it again at 62 and then sell it for 80. There’s really just the normal trading mechanics, like any other asset class out there.

Trey Lockerbie (00:20:13):
Okay. So I could buy a, yes, let’s just say for 95 cents, and then I could turn around and sell it to somebody else for 98 cents and just collect a little bit of a premium that way?

Luana Lara (00:20:22):
Yes. Absolutely.

Trey Lockerbie (00:20:24):
I should also mention, let’s go more into the why now, because the 95, 8 I was referencing is tied to the 30-year mortgage rate, which is speculated that it’ll be under 5.09 from June 3rd to 9th. This is interesting. And I think people can understand this because it’s part of their everyday life typically, is the mortgage, right? And so, what exactly is here? If I were wanting to buy a home and I thought this interest rate would go beyond 5.09, what would be my incentive here? What would I want to be doing with this product?

Luana Lara (00:20:58):
Yeah. So like any derivatives market, our goal is to allow people to hedge or allow price basing in a certain market. So hedging means, let’s say with the mortgage example, you are going to buy a house, you are afraid of the mortgage rate being above, let’s say, X% or 5% or something that, let’s say. What you do is you can come to Kalshi and buy that it will be above that number, so that if it is above that number, you are losing money in your real life and in your mortgage and in your financial planning, but you’re making money on the contract on Kalshi, which allows you to hedge that risk that you have in your day-to-day life.

Luana Lara (00:21:39):
And we really see this with all of our contracts. So we see a lot of people trying to do this for interest rates. They think that if interest rates go up, they have student loans tied to the 10-year treasury note, or they’re trying to refinance their home. And they have a lot of risk associated with interest rates going up. So while they go, they come to Kalshi, they buy a contract saying that interest rates will go up, and they are protected, in case they do go up, by the contract on Kalshi.

Luana Lara (00:22:05):
The other side of this is really the price basing value, which is pretty much the forecasting value of these markets. Let’s say you’re planning on buying a home and you don’t know how the mortgage rates are going to evolve in the next year. You can come to Kalshi and get that information, because the market price for where the mortgage rate will be is the best work for what the mortgage rate will be in the next year and the next month, for the different timeframes that we offer contracts.

Luana Lara (00:22:31):
So the second side is really this price basing, that every person can come and have access to the best forecast in the world for free. And our goal is … hedging and price basing are exactly what Wall Street does. That’s what big companies do with their grain futures or things like that. And what really Kalshi is about is bringing these things to everyone. If there’s a big company, if Anheuser-Busch is able to go and hedge the price of barley going to high, you should be able to hedge your interest rates going up, because you have risks associated to this. So our goal, really, is democratize access to hedging and price basing, and have small businesses, everyday people just being able to make money on these things hedge, and go from there.

Trey Lockerbie (00:23:14):
So on other platforms that roughly remind me of this kind of thing, there’s a lot of gamification involved, and there’s these dopamine-driven events to keep you engaged on the platform. I’m not seeing any of that on this. And I’m curious, is that part of the regulation piece? Because it’s not gambling, technically it’s really trading these derivatives, and it’s a more traditional approach to finance. Was that in consideration, just not gamifying it, or only gamifying it up to a certain point?

Luana Lara (00:23:44):
That’s a great question. The way we think about it is the gamification is it’s what you said. It’s really about the UI and not about the asset class itself. If you think about trading stocks, right? Robinhood, people think it’s very gamified, but you’re buying stocks there the same way you can go to your Schwab account and buy stocks. So it’s not about the asset class. It’s really about the UI and the UX and the things around it. We really take a lot of responsibility in making event contracts reach their full potential and making sure they become mainstream, and they’re very safe and they grow in a sustainable and a good way. That’s why we took the very long and hard regulatory path. And for us, it’s really about making sure the customers are safe.

Luana Lara (00:24:27):
We’re really building Kalshi for the next a hundred years. Exchanges like CME have been around for 200 years. We want to build Kalshi for the next hundred and the next 200. And for that, customer protection is very important. We can’t have our users be confused. We can’t have our users doing things that they don’t understand, or just bad behavior showing up in the platform. So it’s not a regulatory thing. It’s a really internal thing to the company that we are building for the long term. And to build for the long term, we can’t build a UI that’s gamified, or not take this very seriously and event contracts very seriously, which is what we do, and our mission, and what we want to keep doing.

Trey Lockerbie (00:25:05):
And unlike Robinhood, you don’t currently offer margin or leverage type trading. And I imagine this goes to the customer protection aspect, or is that because this is technically in beta and you’re still proving a concept, and eventually things like leverage will come into play?

Luana Lara (00:25:22):
Yes, we don’t offer margin trading at the moment. I think our decision is that it is a new asset class. And I think it’s a lot safer for event contracts to grow and for people to start trading, start understanding how the asset class work, and things like that, without margin in the environment, and then go from there. I think we really see this as the way to start. But yes, it is rooted on customer protection. It’s rooted on we’re building for the long term, so we want to do things the right way.

Trey Lockerbie (00:25:53):
I don’t know, big data is coming to mind. Is there a big data piece of this where people will come to this platform for information, to see where the market thinks these things are going, whether they’re trading on it or not, but they’re using them as indicators? And who would be doing something like that, in your opinion, and or what is the use case for something like that, potentially?

Luana Lara (00:26:14):
Absolutely. So I am a huge market and data geek, as I told you, computer science and math. And that’s one of the reasons I liked finance the most when I started going into the industry. I really see Kalshi’s future as also being this data and forecasting hub where people can come and have access to unbiased forecasting data. I think one of the powers of Kalshi is that it forces people to put their money where their mouth is. I think there’s a lot of people out there that just make money on being radical and inflammatory and just saying things like you saw with inflation, people saying, “It’s going to be crazy hyper inflation,” people saying, “It won’t be anything.” And they have no skin in the game. And because of that, you really get the market, the Kalshi forecast to be people that are putting money behind their beliefs. They just put more effort. They just do more research. And they’re penalized if they’re not correct.

Luana Lara (00:27:09):
So the market ends up being the best forecast for what’s going to happen. I really see in the future, people, instead of going to, I don’t know, The Weather Channel to see if it’s going to have a hurricane in Florida, they’ll come to Kalshi to see what the market, unbiased, with real skin in the game, collection of lots of people, are thinking about it. The same way with inflation, that, I mean, a lot of the economists got completely wrong and didn’t think inflation would get to where it is. And our markets, actually, they got it right. Six out of the past seven months, our markets predicted inflation right. So if you were at Kalshi, you would not be surprised by inflation, even though it seems like the Fed and Janet Yellen and all of these are very surprised by inflation. If they checked Kalshi, they wouldn’t be.

Luana Lara (00:27:50):
So I see, as we grow, really, this data component is what really can have impact on every single American, because it’s just better data for everyone. I think one of my goals with Kalshi is to make, I mean, America and the world a little bit more data-centric, and being able to, instead of making crazy comments and being super excited and having biased information around this, people just have unbiased, good data that they can look at and prepare for the future and make their opinions and go from there. I really see this as long-term, after we become, hopefully, the New York Stock Exchange for events, long term, that’s how we changed the world.

Trey Lockerbie (00:28:30):
What you just said begs the question of, who is the authority at the end of the day, right? So for example, if The Weather Channel’s saying it’s going to rain X% and the market’s saying, “No, it’s going to rain Y%,” but it rains, I mean, it’s interesting to know where to take your information from and who the authority is, or what the source of that information is. So another example would be COVID cases in China. Well, there’s a lot of speculation about how accurate that really is. Who is the authority in that case to win out on that bet, and what what’s the ultimate adjudication of something like that?

Luana Lara (00:29:05):
Yeah. And that was one of the biggest parts of the compliance process. The markets go free before they go live. A lot of our markets for example, are based on government data, like inflation, it’s based on CPI; interest rates, obviously, it’s based on the Fed’s. You touched on a great point, we have the Chinese COVID markets, I think, for those, the expectation of Chinese COVID cases or things like … For example, look at supply chain, right, how crazy it gets because Shanghai was in a lockdown. So it is actually one of the biggest parts of our market creation framework and our compliance process there, to ensure that every market has an oracle or what we call a source agency that is universal, that is very reliable, and if needed, we have to be in data partnerships with them to make sure that people that work on the data cannot trade on the markets to have any manipulation incentive or anything like that.

Luana Lara (00:30:03):
It is one of the hardest things about working on prediction markets. I think that a lot of the prediction markets that tried to launch and exist before, they had trouble with this. But for us, we really take it to core. For example, we use a lot of government-based data sources. We get into all the agreements with the private ones to make sure they’re very universal, very respected and things like that, but it’s a challenge. And I think as we grow, things will hopefully get easier. But people can rest assured, it’s very clear how we’re going to settle the markets, the government, the CFTC review all the markets and review that they’re hard to manipulate, or universal enough, and things like that.

Trey Lockerbie (00:30:41):
So as I mentioned earlier, there’s a wide range of markets or products on this website, on your platform, all the way to something like the Oscars, who is going to win best picture, or things of that nature. So why on earth, how did that make the short list of markets? That is not something that would’ve come to mind, for me at least, for an initial launch of a platform. So how did you determine to go all the way to that end of the spectrum into entertainment, as opposed to moon landing, COVID cases in China, mortgage rates, Oscars?

Luana Lara (00:31:12):
Yeah. For us, we really don’t see it as a category-based thing. We see it as, what are the biggest events, what are the biggest news, where do people have the most risk associated to? And interestingly enough, well, entertainment is one of the biggest industries in the world. And the movie industry is massive. In the music industry, we also had Grammys markets. It’s also massive. And there’s a lot of people with a lot of risks associated to this. There’s obviously the studios that are running for things, there’s Netflix and, I don’t know, Apple TV employees that are working on movies, and maybe their job is on the line because of this. It’s generally just a massive industry that right now, if you work on it, or if you’re a company on it, or if you’re even selling merchandise associated to a movie or like Spiderman, you have no way to hedge it.

Luana Lara (00:31:58):
And for us, it’s really about, “Okay, well, the farmers and the agricultural agriculture industry have a lot of ways to do this. Why is it not there for other industries? Why is it not there for science? Why is it not there for entertainment,” and go from there. For us, it’s really about understanding these risks. And for example, for the Grammys, it was actually a very interesting conversation we had internally, because for the Grammys, it was really about, for us, the influencers, right? There’s a lot of influencers on TikTok, on Instagram reels and stuff like that, that they are pretty much living off music and trends and things that are going on. And they have absolutely no way to hedge or do anything related to that.

Luana Lara (00:32:37):
And the discussion internally was, “Well, but are they going to come hedge?” And then one of the people internally, they were very, very fascinated about this. They went around, found 10 influencers that they were like, “Oh my God, yes, because I’m preparing all of these videos about Grammys content, and all of these things that I’m putting weeks and weeks into this.” So for us, it’s really about finding these niche opportunities on hedging and price basing and bringing markets to them, and help go from there. And obviously, it’s a cultural market, right? Everyone watches the Oscars. This year with the slap, and things like that. So also interesting from that point.

Trey Lockerbie (00:33:11):
That’s reminding me of this quote I heard from Jimmy Fallon, who said he got out of the movie business because he’d have to wait two years from filming it to it being released to know if it was any good or not. And then a lot of these actors, to your point, a lot of the revenue is tied to the performance of the movie, right?

Luana Lara (00:33:28):
Yep.

Trey Lockerbie (00:33:28):
They’ll get some initial fee up front, but then a lot of the points come from the revenues that come in after the fact. So if you’re Jimmy Fallon and you’re waiting to see if this movie’s any good, you could buy that this movie’s going to tank, some insurance, whether it tanks, and at least you’re collecting some income. So fascinating stuff. Where do you think we will be, five years from now, as far as the markets you have today versus where this is all going?

Luana Lara (00:33:51):
We want to keep adding markets that are in the news, that are relevant to people at that time. I don’t know what’s going to be happening the next few years. We try to have some longer term markets like inflation, moon lending, interest rates, that are a bit more longer term. But for us, it’s really about bringing markets that people are interested in, they have risk associated too, they have a lot of opinions on and opinions around. And we just want to keep doing that and growing the platform and growing the use case, and really getting event contracts to be more mainstream.

Luana Lara (00:34:21):
I think our goal five years from now is that if you’re turning on your CNBC or your Bloomberg TV, instead of saying, “We believe the Feds are going to do this,” they’re like, “Well, the markets thinks this are going to happen.” And people on the street when they are, “Oh, wow, I’m going to travel to Miami this next week for a vacation, I’m going to insure the weather. And I’m going to buy that it will rain all the time, so that if my week is ruined, I will at least have some money from my hedge,” and go from there. So for us, it’s keep growing the number and the quality and the markets that we’re we’re offering, but also just growing it with the users, getting more users, making sure we are getting the use case across, and things like that, and education, and all of that.

Trey Lockerbie (00:35:06):
Now, the only issue I would highlight there is that if I know anything about markets, they are sometimes irrational, right? And so, while they’re mostly efficient, not always. And so, I’m curious, if I sign on this platform and I see that, “Hey, this is a really wide spread,” like something’s 99 to one or something, that this thing is really going to happen, that is influential, almost, I would argue, more so than a stock price, because you’re seeing sort of the other side of the trade in a very limited way. So that market being an indicator is somewhat scary, in a way, because as Jim O’Shaughnessy would say, “You win by the arbitrage of human behavior.” And so if humans are all in this herd mentality, moving towards something that is really wrong ultimately, then of course someone benefits on the other side. But if people are using it as indicators, there might be some issues there, no?

Luana Lara (00:35:58):
Well, what I think is interesting about I guess your first point about the difference between the pricing here and pricing in stocks, is that events have a true fair value. There is an actual probability that is true to an event to whether it would be a yes or no, versus stocks, there’s no real, “What is this company worth? How much is Tesla worth, or GameStop?” And there’s no real bounds. With events, there’s a real probability. So if people start shooting a market up to 80, let’s say it’s at 70, goes to 80, goes to 90 very fast, there is a lot of incentives for people on the other side to be like, “Wow, there is an insane amount of money to be made, because I know, based on my research, that the fair value is 60 cents.” So you can buy the other side.

Luana Lara (00:36:43):
And actually, there’s a lot of research around prediction markets, around elections, actually, that people try to manipulate or buy a certain candidate to see the price go up. And you just see so quickly the other market participants buying against that and bringing it back to fair value, because there is a fair value in this market, so you really have a lot of very clear opportunity to bring it back to fair value. Because in the end, events have an end date where if you’re right, you make money. So there is this fair value. There is this settlement decide. It’s not like stocks that if they’re up forever, maybe they will be, you don’t know, you can’t predict. And I think that’s what’s actually very cool about these markets, is that you do have opportunity to combat this type of attempted manipulation on the market itself. The markets themselves ensure you’re always around fair value, always around forecast, because otherwise there’s just free money to be made. And traders are amazing and finding free money to be made. And there’s a lot of research that confirms that.

Trey Lockerbie (00:37:36):
When I was clicking around on here, one thing I was interested in was the volume of the trades happening. And it’s not so clear, you do see these gray bars, these bar charts that give you, I think, some impression of, “Hey, it’s been a big day of trading, or not.” But I’m curious, how liquid are these markets currently, maybe compared to where you see them going soon?

Luana Lara (00:38:00):
We’re seeing a lot of markets with hundreds of thousands of dollars of liquidity. And that’s really a lot of progress from where we were a couple months ago. Couple months ago, I think we were the tens of thousands, and now we’re on the hundreds of thousands. Our goal is obviously for these to be extremely liquid, as hopefully as liquid as other derivatives or as stocks. And we really see one of our biggest challenges as a new exchange is building liquidity.

Luana Lara (00:38:25):
So really, our strategy is starting with retail. After retail, we’re going to have hopefully broker integration so that people can go through their Schwab account or their interactive broker account and trade on Kalshi, and being able to bring liquidity providers at around that same point in time, so that you really match hopefully an increase in demand with an increase in supply there, and go from there. In the next year or so, we really want to at least be on the millions of tens of millions of liquidity. And more longer term, we want to be as liquid as any other asset class.

Trey Lockerbie (00:38:57):
Now, I heard you mention Schwab just there. And from what I heard, Mr. Schwab himself is actually an investor in Kalshi.

Luana Lara (00:39:05):
Yes.

Trey Lockerbie (00:39:05):
So, walk us through that story. There’s a number of other impressive people at the cap table, Sequoia, Y Combinator, a few others. Talk to us about the Charles Schwab experience. So, that’s really interesting.

Luana Lara (00:39:18):
Right. So, right after we got the regulatory sign-off, right when we got the license, I guess, to be a DCM, which is a designated contract market, we went to raise our Series A. And Sequoia went to lead our Series A. And we brought Alfred Lin in to the board. And interestingly enough, Alfred, actually, his PhD was around statistics. And it was actually around prediction markets and exactly what we do. So he was extremely excited from the start. One of the biggest challenges he gave us even before we raised around was Alfred told us we needed to figure out regulation. And we were like, “Yes, we know that. That is what we’re working on.” And when we actually got the regulatory sign-off, we raised a round from them.

Luana Lara (00:40:02):
And then after getting Sequoia … I mean, Alfred is an amazing operator, right? He’s been amazing at investing in companies that were really category defining, like Airbnb, DoorDash. So we really wanted his type of operator mind, and also the way of thinking about this very new type of companies, very new type of product, and really category-defining companies and product. So we decided to have Alfred on board. And then after that, we wanted to bring people that would give us the most knowledge we could about finance and about Silicon Valley and how to build the best of both worlds in terms of a company, a company that is Silicon Valley-based and in nature very fast, but also very stable, secure, and with customer protection at its core.

Luana Lara (00:40:49):
So we went to find these angels to invest. And I think Schwab was obviously one of our top people that we wanted to have at the cap table. I’m sure that everyone can imagine why. And he was very excited about it. He told us it was very similar to when he was starting his company, and how he saw the potential for Kalshi. And we were very, very, extremely excited to have him on board. And we’re still very close to him. And other people we brought into the cap table were Henry Kravis, which I’m sure needs no introduction, and Ron Conway on the Silicon Valley side, that’s also invested in almost every single successful startup in Silicon valley. So we really, at the Series A, tried to bring all the brains that we could to help us in this very hard mission we’re going through.

Trey Lockerbie (00:41:31):
It’s just nice to hear that someone who’s 84, like Charles Schwab, is as excited and invested and interested as he is. I think that’s part of the secret, right, is that these guys are typically doing just what they love to be doing, and they probably do it for fun. They certainly don’t need to do it for money. So that brings up another question. You were on the Forbes 30 Under 30. It begs this question of mentorship. And besides Charles Schwab, anybody else that comes to mind as sort of a mentor to you, since you’re so early on in your career?

Luana Lara (00:41:59):
Yeah. So I think in the company, I want to divide it, I guess, into the investor side of things and the coworker … not coworkers, co-founders, I guess, my co-founder, but also other founders, for example, in the YC batch that we were in. So on the founder side, we are very close to a lot of other founders around our stage. And I think it’s less about mentorship, obviously, but it’s a lot about sharing experiences and what you’re going through. And you’re going to realize that a lot of things that you’re going through, they just went through last month. And that’s how they dealt with it, that’s the mistakes they made, and that’s how they solved it. And the problems you have, they might be having soon.

Luana Lara (00:42:39):
So we really try to stay close to the community and learn, and just learn from them as much as we can. Also to Tarek and I, around being better co-founders and managers, if the company works out, which hopefully it will, to be a huge, hopefully hundred billion dollar company, we’ll have thousands and thousands of employees. And we need to become great managers, great leaders. And we have a lot of investors. I think Ali Partovi from Neo, he is probably the closest investor I have to me. And he’s been a mentor from the very start of the company, strongest and biggest personal mentors. He’s also an investor in the company. I met him through that. But he is just fantastic. So Ali Partovi is probably one of my biggest mentors.

Trey Lockerbie (00:43:16):
So if we are using this platform as an indicator, a lot of what we talk on the show about is macroeconomics. And one topic as of late is whether or not we’re in a recession. So if I go to your website, I actually see that it seems like the highest performing market, dollar-wise, is, “Are we in a recession by Q2 2022,” which is right now. And we’re seeing yes at 93% and no at 10%. So there you go, you got your answer. We’re going by the market. I’m also looking at some of the other outperformers. Obviously, price of oil is up there, how many number of interest rate hikes will there be? Some of these are obvious, but curious about the markets that do perform better than others, and are there sometimes surprises in that?

Luana Lara (00:44:03):
Yeah, actually, when we started the company, we thought it would be concentrated in specific categories. So we were like, “What category is it going to be? Is it going to be economics, financials?” And what we learned very quickly, it’s actually what’s closest to in the news and closest to top of mind. So whatever is front page at Wall Street Journal was all over CNBC, that’s usually what’s going to concentrate the most volume.

Luana Lara (00:44:29):
So I guess some examples of this, the Omicron wave at the end of the year, at the end of last year. Interestingly enough, about the data point, again, our markets were predicting the Omicron wave before Thanksgiving. They were already predicting we were going to hit another wave that would be a lot bigger than all the other ones. But the Omicron wave, all of January, the most important markets and the ones with the most volume were the COVID-related ones. So it’s really about what’s top of mind, what people think they have better opinion or edge on. It’s very correlated to what’s in the news.

Trey Lockerbie (00:45:01):
Yeah. And on that point about COVID, one of the other top performing markets it seems is whether or not we’re going to return to March 2020 COVID levels. And it’s a 63 to 39 yes, no, which is a little bit concerning, as well. So I hope that one’s particularly wrong, but it is trending in that direction.

Trey Lockerbie (00:45:19):
All right, so now I want to shift gears a little bit and talk about future billionaire Luana Lopes Lara. So you mentioned earlier, you studied computer science. You’re wearing an MIT sweatshirt, for those who are listening and can’t see. You studied computer science at MIT. How on earth did you fall into starting this company and getting to where it is today?

Luana Lara (00:45:40):
Well, I think I should add something that’s even more random before. So I’m from Brazil, but I used to be a professional ballerina before going to college, so that’s completely different. But from MIT to starting the company. I studied computer science and math. I think from the beginning, I thought I wanted to be more of an engineer and building things. My dad is in electrical engineering. My mom is a math teacher. I thought that’s what I wanted to do. But very early, I realized I liked the math side a lot more than I liked the engineering side. And at the MIT, I talked to a bunch of my professors and they were like, “Well, if you like math, you like statistics, you should try finance. We’ll work there.”

Luana Lara (00:46:16):
So I worked at Bridgewater first as more on the engineering side, then I went to Five Rings Capital, which is a small prop shop in New York, mainly doing quant research. And then I went to Citadel Securities to do trading. So I tried, I guess, the finance industry from a lot of different angles, from the more engineering side, the more trading side, research. And I love the finance industry. I think that it’s fascinating. I’m very competitive person. I think it’s fast paced, it’s intellectually challenging, and finance history and the world history, just everything is about how economies are moving, in my opinion.

Luana Lara (00:46:53):
So I was fascinated by that. And I was very close friends with Tarek from the very beginning of college. And he was also very fascinated by finance. And we both started noticing in all of our work experience that most trading is actually based on events. So he was at Goldman Sachs. It was 2016, when Brexit was happening. So people were calling his exotics desk, that’s where he worked, like, “I want to get exposure to Brexit. I want to hedge Brexit. How do I do that?” Me, for example, when I was at Bridgewater, most of the trades that we were building systems for were around, “We think European Central Bank will raise rates and we think inflation will do this.” That’s how we’re going to come up with this very complicated portfolio of things and volatility swaps and things like that, to be able to put this position in the market.

Luana Lara (00:47:40):
And we started being like, “Why is there not a real exchange where you can just directly put this opinion and directly hedge this and directly have exposure to this? And why are only these very, very big players that can call their bank or Goldman Sachs, and do these things? Why is it not accessible to everyone?” And that’s when we really got, I guess, the bug in our head and being like, “Okay, now, why doesn’t this exist?” We started putting, I think, two hours a day looking into this. And then it was 12 hours soon enough, and we started calling 65 lawyers in a day. And it was never, for me, never about starting a company. I probably was going to go into finance and be happy there. But for me, I just found this problem, and Tarek and I just couldn’t get ourselves outside of solving it. And we wanted to be the one solving it. So that’s why we went through and started the company and went from there.

Trey Lockerbie (00:48:32):
So for those wondering, this wasn’t a COVID project where most people were baking bread, you were starting this global exchange. No, this has been in the works for a long time. And you have such a pedigreed background and the expertise to execute on it. I want to touch on, quickly, the Bridgewater, Citadel experience. Was there anything in particular you’ve picked up from being in that ethos versus a Citadel ethos and seeing the comparisons? Has anything found its way into the Kalshi ethos through osmosis?

Luana Lara (00:49:01):
Bridgewater and Citadel could not be more different. Culture-wise, I think Bridgewater is very much a slower moving institution, at least from the engineering point that I was in. It’s a way bigger, slower institution and processes, and way bigger teams. And Citadel is the other side of the culture. It’s very matter of fact. There’s no cult, there’s no philosophy, there’s no too much thinking. And it’s more about you have results, you’re good; if you don’t perform, you’re out, and you’re out very fast. And that’s what a lot of my friends that stayed there, that’s a very stressful environment, from that perspective. And at Bridgewater, there’s a lot more philosophy in thinking about things from first principles. And at Citadel, it was more of a, “We just want to win and perform right now.”

Luana Lara (00:49:47):
I think both of them have a lot of impact on how Kalshi is. I think that transparency point at Bridgewater is something that I think is an amazing thing. And I think that’s something we take to core. I think transparency and having everyone’s voices heard and concerns heard is very important. I think, especially at a startup, really allows us to move fast. And both me and my co-founder, we have an insane amount of things to do every day. We can’t be on top of every single thing happening in the company. And making sure that we have everyone freely bringing stuff up and trying to solve problems themselves and being transparent about issues is something that has really impacted how the company’s worked so far.

Luana Lara (00:50:25):
And from the Citadel side, we are very much a performance-based company. We want people to perform. They have goals, and they need to meet the goals. We want to win. And I think, especially as I said in the beginning, we welcome competition, and we are happy to do that. And we’re a very competitive company and competitive people, so we really take the performance and execution side of Citadel to our culture as well.

Trey Lockerbie (00:50:48):
Speaking of winning, is there any competition at the moment that keeps you up at night?

Luana Lara (00:50:53):
There’s no competition that keeps us up at night, but we have a lot of unregulated … some crypto-based, some unregulated offshore companies that do try to do what we’re doing, but nothing that keeps us up at night, nothing that’s regulated or are doing things the same way and with the same strategy we are.

Trey Lockerbie (00:51:09):
No one as crazy as you; okay, got it. So going to another experience you had in early days was this Y Combinator experience that we didn’t quite touch on, but I want to cover quickly what your experience was there, because I’ve heard mixed reviews about Y Combinator, whether it’s worth it or not. Maybe it just depends on the type of industry you’re going into, and et cetera. But what drew you to Y Combinator? What was the experience like, and what were your biggest takeaways?

Luana Lara (00:51:34):
Yeah, so Y Combinator is a startup accelerator in California. A lot of amazing companies came out of there, like Airbnb, Stripe, Dropbox, Reddit, and I think Twitch and others. And I think Paul Graham started it with a couple of other people. Paul Graham is, I guess, very famous person. So maybe that’ll turn on some lights for people. But yeah, so why we decided to go to Y Combinator. So as I said, both me and Tarek, our background is computer science and math. We had no idea how to run a company, how that worked, hiring, raising, thinking about product, nothing. All we knew is, I don’t know, statistical learning theory and information theory and something like that.

Luana Lara (00:52:17):
So for us, the way we saw it was obviously a major step from just being true kids, now in their master’s, trying to start a company, to really legitimize what we’re doing. But more importantly, it was really about getting the help and the setup and the support that we needed for the future, for the next steps of the company, and learn as much as we could. We had a very weird Y Combinator experience because while most people at YC, they’re trying to build traction, build product, iterate very quickly, get users in and show a lot of the hockey stick graph going up and to the right, demo day, which is the final presentation to investor, for us, our goal was, try to start getting the regulatory process kicked out.

Luana Lara (00:53:04):
And so for us, it was very weird. We had weird goals. It was a lot harder to try to show our progress, and things like that. But the lessons we got from there were invaluable. And nonetheless, I think that we learned a lot about hiring. We learned a lot about company culture, about product iteration, user feedback, testing, all of those things that, I don’t know, maybe if we were other types of majors in college, we wouldn’t have needed Y Combinator. But to today, we always ask ourselves, “What would Michael Seibel say?” He’s the CEO of YC, and he was our mentor in YC. And we are still very close to YC. They help us so much, to nowadays, all the partners are willing to get on a phone call with you at any point in time, and things like that. So when people ask me, “Is YC worth it,” I don’t think Kalshi would be where it is without YC. Maybe if you’re a second time founder and you know a lot about a lot of things, you don’t need it. But for us, it was definitely an instrumental part of Kalshi’s history and why we’re here.

Trey Lockerbie (00:54:01):
But as I understand it, a lot of people, Y Combinator worked, also telling you you’re crazy up front, even for a Silicon Valley startup. I mean, that must be really something, right? So I wonder if it’s from this first principles mindset you came from with the Bridgewater experience, just a lot of people telling you no to your face early on, and you basically saying, “These are really smart people telling me this is a really dumb idea,” and yet here you are pulling it off. So I mean, kudos to you, first and foremost, but also just curious about where that sort of … you mentioned stubbornness before. But I mean, where does that come from, in your opinion?

Luana Lara (00:54:38):
Yeah, that’s a great question. Indeed, everyone told us we were crazy, at every point in time. But I think for me, the stubbornness comes from a couple of different things. I think from ballet, I guess I’ve always learned about sacrificing and delayed results. And in ballet, you’re working very hard. You’re almost not eating, and you’re doing all these things because you want to accomplish your goals. And you really see this delayed gratification and sacrifice to achieve bigger things. And I take this to my core to today. I think that if things are very easy to be done, they would already be done, or they’re not that important to be done. And I think that if you’re willing to put on the work and you’re willing to work harder than everyone else and you’re willing to tackle the hard problems, you’re going to be able to make more change and make more impact than other people.

Luana Lara (00:55:30):
I think that for us, it was especially tricky to be in Silicon Valley, because there’s this general culture of moving fast and breaking things. And you see Uber that went unregulated and was able to figure it out, and a lot of crypto companies trying to do this. So there’s always a lot of pressure of like, “Why are you trying to do this this way? You’re going to take two years and a half to even know if people want your product. That makes no sense.”

Luana Lara (00:55:54):
And for us, it really went back to, this is what we wanted to do. This is the mission. What do we believe is the right path to get there? And we tried to not listen to too much noise. I think Silicon Valley, there’s so much noise about everything, and, “This company’s doing amazing.” And then next week, it’s … Then things like that. So we just tried to stick to first principles and do what needed to be done for the company to succeed. And at that point in time, it was for us to sit down and work very hard and deal with the uncertainty and do the work that no one wanted to do.

Trey Lockerbie (00:56:28):
I’m glad you mentioned ballet. I mean, honestly, when I was doing the research, I was like, is ballet a sport? I didn’t even know. It turns out it’s an art form, but you would think it’s a sport, I mean, just given the sacrifice you were mentioning, and the hard work and the athleticism involved. It’s really remarkable. I love that you were able to draw from that experience and put it into your own business experience. I think that’s so important, to bring that element into this thing.

Trey Lockerbie (00:56:53):
And another element I want to talk about is your co-founder, Tarek, who also was a professional athlete, as I understand it, before starting this company, while doing his own education. So talk to us about how important it is to find the right co-founder. And specifically for you and Tarek, how do you compliment each other? What’s your superpower compared to his? How does it work?

Luana Lara (00:57:14):
Yeah, so to start with the ballet thing, 100% agreed. I think I used to train eight to 10 hours a day on top of normal high school things like math and science. And till today, I think it really changes how I work with the team and how I see different challenges at Kalshi. Talking about Tarek and I, I’m an extremely optimistic person. He’s way more on the pessimistic side. They even call us yin and yang here in the office, of how we deal with things. And I think a lot of my optimism really comes from ballet and being able to know if you work hard, things are going to work out, and that kind of mentality that is very much around in ballet. But about Tarek and I, yes, we are, funnily enough, from completely different parts of the world. He’s from Lebanon, I’m from Brazil. But we have very, very similar backgrounds. I do consider ballet a sport almost. So I think it’s both, as you said, a sport and-

Trey Lockerbie (00:58:11):
We don’t care what Google says, yeah, exactly.

Luana Lara (00:58:12):
Yeah, a sport and an art form. And Tarek was an amazing skier growing up. He was a professional skier. And both of us were very into math. So I used to do Math Olympias and stuff in Brazil. And he used to do the French Math Olympics and things like that. I think where we really complement each other is not necessarily on our skills, because we did study the same things, and we’re very similar that way, but it’s really our personalities and our views on different things. I think that Tarek’s very good at … I think he’s actually the best that if he sees one problem that really needs to be solved, he goes very deep into solving that problem, and he will figure it out. And I’m way more of a breadth person. I like doing a lot of different things and trying to figure out and move them forward.

Luana Lara (00:58:53):
So in terms of running a company, it ends up working very well together because I’m better at working with different people, making sure things are moving, and he’s way better at finding one thing that needs to be solved and figuring that out. Personality-wise, also, I’m very optimistic, as I said. He is more on the pessimistic, paranoid side. What I always say about co-founders is that the most important thing is finding someone that you really, really like, because it doesn’t matter … you’re going to be with this person almost, I would say, 18 hours a day, 20 hours a day, for hopefully a lot, a lot of years. And you need to be able to respect each other, admire each other, and trust each other blindly. And I think that we really have that. He’s the best co-founder in the world. I would definitely not be here without him, and I think he wouldn’t be here without me either. So I think it’s less about complementing skills. I think it’s more about just finding the right person to go on this crazy and extremely hard journey with.

Trey Lockerbie (00:59:47):
Well, you can’t have two blind optimism people, because then nothing gets done, right?

Luana Lara (00:59:52):
Right.

Trey Lockerbie (00:59:52):
No, I’m kidding. So, this has been great. Hey, Luana, I really appreciate the time. Congratulations on all of your success.

Luana Lara (00:59:59):
Thank you so much.

Trey Lockerbie (01:00:00):
It’s very impressive. And I am excited to follow up with you and see where this platform takes you and takes the world, really. So congratulations again, and let’s do it another time.

Luana Lara (01:00:10):
Thank you so much.

Trey Lockerbie (01:00:12):
All right, everybody. That’s all we had for you this week. If you’re loving the show, don’t forget to follow us on your favorite podcast app, and please leave us a review. If you want to get in touch another way, you can find me on Twitter, @TreyLockerbie. And if you really want to up your investing game, I highly recommend you check out TheInvestorsPodcast.com, or simply Google TP Finance. And with that, we’ll see you again next time.

Outro (01:00:31):
Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by The Investor’s Podcast network, and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to TheInvestorsPodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.