Good morning, everyone, and welcome to Expo!
It’s great to be in Chicago on such an important day in America: Election Day. Or, to describe it in market terms, “Our National Wisdom of Crowds” Day!
Yes, we have seen the polls and the prediction markets. But ultimately, election day is when polls converge with reality. Just like Delivery Day in our markets.
Chicago is the perfect place to spend Election Day, where the price discovery markets began, political machines thrived and two US Presidents launched.
Chicago is also home to the best sports fans in the country. And we are thrilled to tap into that enthusiasm today.
We are disappointed that ESPN’s Michael Wilbon could not speak due to an unexpected health issue and wish him well. But we are thrilled to have ESPN’s award-winning broadcaster, J.A. Adande, help us to unravel the ever-changing business of athletics.
J.A will be joined by local sports favorite, Jarret Payton, son of Bears Hall of Famer, Walter Payton, to help us make sense of the world of sports.
I’ll confess that I am a heavy ESPN watcher and a big fan of the ESPN show, “Pardon the Interruption.” Celebrating its 25th season, it’s a clever, informative and rollicking 30-minutes of everything happening in sports.
And that got me thinking. Hey, I’m sometimes clever. I’m occasionally informative. And our markets are pretty rollicking.
So, I decided to borrow the format for my own, “Excuse the Disruption” show or ETD, where we can have some fun with the disruptions facing our industry.
As they say on PTI, let’s jump in, knuckleheads!
Topic 1: Elections Have Consequences
Let’s start with today’s midterm elections.
If the elections play out like the prediction markets are indicating, it will be a long night for the Republicans. The war in Iran, affordability, and just exhaustion over Washington drama has voters looking to make a change. What does this mean for our markets?
First, we will see a big shift to Congressional oversight of the executive branch and a slowing of the regulatory agenda.
I speak from firsthand experience.
When oil prices peaked above $145 dollars a barrel in 2008, I was Acting Chair of the CFTC. And I was called to testify six times in six weeks, including twice in one day. The agency’s agenda was consumed by Congressional inquiries.
If Democrats take control of both chambers, they will use their oversight powers on steroids and place a time-consuming check on the executive branch.
Divided government will likely cause the legislative agenda to grind to a halt, which does not bode well for the Clarity Act. This is the legislation that FIA has supported for the last two years to establish a market structure framework for digital assets.
Today, prediction markets put the odds of Clarity Act passage at 20% by the end of 2027, but if I were a betting man, I would short that contract. And with legislation on life support, it now falls to the SEC and CFTC to hammer out a regulatory framework based on thin statutory authority.
Complicating these regulatory efforts, the Supreme Court has significantly curtailed the authority of independent agencies.
Needless to say, it’s complicated. And only time will tell if these regulatory efforts lead to improved market certainty or endless lawsuits.
Topic 2: Prediction Markets—Gambling or Investing?
Speaking of lawsuits, prediction markets have exploded onto the scene and captured the attention of young and old investors alike. They offer intuitive “Yes or No” contracts tied to elections, economic indicators, and yes, sporting events. And they have proven to be very accurate.
That said, we have seen critics raise concerns around the CFTC’s jurisdiction over gaming. The states, Indian Tribes and even the NFL are now advocating for excluding sports gaming from the CFTC’s oversight.
As this public debate rages on, CFTC Chair Mike Selig has defended his agency’s exclusive jurisdiction in court.
If reasonable people have differing views on the law, Congress should step forward and clarify its intent. That’s its role. And if it doesn’t, the courts will force their hands.
While this jurisdictional battle plays out, there are other policy concerns hanging over these markets.
We’ve all read stories of insiders using privileged information for their personal gain. Not a great look. So, let’s be abundantly clear: our industry has no tolerance for anyone who manipulates our markets. Period.
The CFTC and prediction markets need to provide clear guidance and take strong enforcement over this activity. And the good news is that they are beginning to do just that. We need to remain united and diligent on this problem.
Second, let’s fix the self-certification process that has been overwhelmed by these contracts. Last year we saw the number of self-certified contracts triple.
Congress never wanted self-certification to be a “check-the-box” exercise. It was meant to be a carefully considered process for exchanges to list products after showing proof the law is being met.
I should know. I was involved in the development of self-certification in 2000 when I worked in the Senate. And I am pleased that the CFTC has issued guidance to make sure the markets show their homework and avoid shortcuts.
Finally, we really need to think carefully about leverage with these products.
I understand the need for margin for hedging instruments that serve an economic purpose. But I question the value of excessive leverage for purely speculative retail contracts. This will need to be carefully considered by policymakers.
But playing the long game, these issues will sort themselves out, one way or another. And once they do, I believe we will continue to see strong demand for these products in the years ahead.
Topic 3: OK Computer
Compute futures are another emerging innovation. And the excitement around this product is driven by the demand for AI and data centers.
Compute futures are cash-settled contracts tied to the rental cost of computing capacity. They offer AI developers, cloud providers and datacenters a way to manage volatile operating costs while improving price transparency. These products remain at an early stage, but analysts compare its potential -size to the oil market.
Policymakers are closely watching this trend and appear focused on how exchanges measure the underlying benchmark. This is the right focus.
A derivatives contract cannot succeed without a reliable pricing reference based on objective, observable criteria. We’ve seen where poor benchmarks have led to bad results. Think Libor. So, let’s sort this out, establish reliable benchmarks and let the competition begin.
Topic 4: The Perp Walk
Our final hot topic is perpetuals, and there is a lot of buzz around this product.
One of the fundamental questions is whether this new product cannibalizes traditional futures markets or whether it grows the pie as a complement to our markets.
Nobel Prize-winning economist Robert Shiller first theorized these products in 1992. And today, perps are a growing derivative product that mimics the price of an underlying cash or futures benchmark without ever expiring.
And while on-exchange volumes remain low, these products have the potential to take on a material amount of global volume, based on their popularity offshore.
This has pushed policymakers into action. Here in the US, the CFTC has asked the public for feedback on this product’s unique risks and how regulations should be adjusted.
Now, skeptics have raised alarms. Unlike conventional futures, there is no expiration and delivery to force price convergence. Instead, price discovery depends on a funding-rate mechanism that itself must be robust against distortion, liquidity shortfalls or manipulation.
Market end users and hedgers also raise concern about the “tail wagging the dog” effect, and the impact of perps on the underlying hedging markets.
Responsible innovation requires us to be skeptical and ask hard questions of these new products. Additional guardrails may be needed around leverage, default management, and customer protections.
We are in the early innings of this new product but if we get the protections right, the potential for broad acceptance is enormous.
The Wrap-Up
So, what are the takeaways from these disruptions?
First, our markets are as innovative and competitive as I have seen in my thirty years in the industry. And this competition drives lower costs and better products for customers.
Second, as an industry, we don’t simply support innovation at any cost. We support responsible innovation.
This means we innovate without losing sight of market fundamentals. If innovation diminishes the core building blocks of trust, fairness or integrity in markets, it’s not worth the price.
And lastly, we should not feel anxious about these disruptions as long as we stay focused on the fundamentals of sound markets. This is our north star.
The more we stay united on this outcome, there is nothing we can’t handle together.
The Closing Bell
Before I wrap up, it’s time for the Closing Bell.
Free the Onions
Clever University of Chicago students have started a protest campaign to repeal the CFTC prohibition on onions futures. I love this many-layered story.
This could be the start of a new political party.
Hall of Fame:
Every year at Expo we announce our new class of the FIA Hall of Fame. Please congratulate the 2027 class of inductees that will be officially put in the Hall of Fame in March at Boca.
Rob Creamer, President & Chief Executive Officer, Geneva Trading
Paul Cusenza, Chairman & Chief Executive Officer, Nodal Exchange
Emma Davey, Former Chief Commercial Officer, FIA
Rama Pillai, Managing Director, Head of Global Sales, Singapore Exchange (SGX)
Verena Ross, Former Chair, European Securities and Markets Authority (ESMA)
Cassandra Seier, Former Head of International Capital Markets, NYSE Group (Posthumously)
A deserving class of leaders indeed.
So, enjoy Expo, free the Onion, be kind to your neighbor and embrace the disruption of the next two days.
Thank you.
