Robin Hood's Prediction Markets: Revolutionizing Trading and Information Access

Introduction to Prediction Markets

Robin Hood, the popular trading app, has recently launched a new product offering called prediction markets. To learn more about this exciting development, we spoke with Steve Quirk, Chief Broker Officer at Robin Hood markets.

Prediction markets are a type of derivative that allows traders to bet on the outcome of future events. Unlike traditional sports betting or gambling, prediction markets are regulated at the federal level and treated similarly to other financial products.

How Prediction Markets Work

Quirk explained that prediction markets function similarly to futures contracts:

"It's really probability based. It's a dollar per contract. So one team might be 70 cents, the other 30 cents, implying probabilities there. Then the contract settles at the end of the game with one team being 99 cents, the other 1 cent."

The markets are peer-to-peer, but Robin Hood works with trusted market makers to ensure liquidity. Contracts pay out $1 at settlement.

Benefits for Traders

One of the key benefits of prediction markets is providing traders with timely information that can impact their portfolios and decision making. Quirk gave the example of the 2020 US presidential election:

"We were sitting in a room in New York watching the election...It was an hour before any of the networks had called it and the contracts went like this. Crypto went like this. Tesla went like this. Everything was moving."

This allowed Robin Hood users to get real-time information about the likely outcome before it was reported by major news networks.

Current Offerings and Future Plans

Robin Hood is currently offering prediction markets for the NCAA basketball tournament. Quirk said they plan to expand into more economic events like GDP and PPI numbers, as those "move markets as much as anything else."

While sports are part of the offering, Quirk emphasized that prediction markets go far beyond just sports betting:

"There's too much there. Think about it with economic events, with elections, with information. Really what it is is customers want information that's going to be able to help them in their decision making and their investing, and that can apply to virtually any industry."

Regulatory Considerations

As a new type of financial product, prediction markets required careful regulatory consideration. Quirk explained that they worked closely with the CFTC and NFA:

"We're in constant contact. We tell them 'Hey, this is what we're thinking of doing, are you okay with it?' They want information, we share information."

He noted that it falls under CFTC jurisdiction rather than the SEC. Robin Hood had to go through extensive testing and compliance checks before launching the product.

Technology Enabling New Products

Quirk highlighted how advances in technology have enabled products like prediction markets:

"If you would have told me like seven years ago, eight years ago that a firm that does 99% of their trades on an app was going to be one of the top option trading firms in the US, I'd be like no way. It's too complex. But that's what technology does for you - beautiful design and the advent of technologies that permit you to do things."

He noted that having trading capabilities always accessible on your phone is a key advantage, as "news is happening around the clock, trading's happening around the clock, assets are trading around the clock."

Potential for Arbitrage

Some savvy traders are already finding potential arbitrage opportunities between Robin Hood's prediction markets and traditional sportsbooks. Quirk sees this as a positive:

"For somebody like you who does this on a daily basis, having more optionality is just a good thing."

He noted that Robin Hood aims to compress margins and deliver more value back to customers compared to traditional betting markets.

Changing Perceptions of Retail Traders

Quirk pushed back against the "tired, antiquated narrative that retail customers are stupid and they buy the top and sell the bottom." He said Robin Hood has data showing their customers often outperform major indices:

"We basically created an index and we said alright, what are the top 100 symbols that are held here by every customer...Let's take a look at all those, see what's changed, and then overlay it on the NASDAQ, overlay it on the S&P and show me how our customers are doing. And you can guess what the results have been - they actually outperform."

He emphasized that retail traders deserve respect, as "they have no guidance, they have no compliance, they have nobody helping them."

Democratizing Investing

A key part of Robin Hood's mission is democratizing investing and making it accessible to more people. Quirk shared an anecdote about a customer who told him:

"This has transformed my life and not only my life, but now I've shared it with a bunch of other people, my family and friends, and it's transformed their life."

He noted that Robin Hood is helping drive increased stock market participation in the US, with "58% of US households" now invested. The company is also looking to expand internationally to bring these opportunities to more people globally.

Views on Crypto and New Asset Classes

When asked about his views on cryptocurrency, Quirk said:

"I think what's coming out of crypto and what will come out of crypto is going to be really magical. Like the ability to do instantaneous settlement, the technologies behind it, and just the advent of a lot of things that that community and that asset class can provide."

He drew parallels to how other new financial products like mutual funds, ETFs and options were initially viewed with skepticism before becoming mainstream. Quirk cautioned against older generations being overly prescriptive about how younger investors should approach the markets:

"I don't really care how you invest. You've had success, God bless you. But our 20-some year old customers aren't going to invest the way you did."

Conclusion

Robin Hood's new prediction markets offering represents an exciting development in retail trading, providing users with new ways to gain information and exposure to different types of events. As the product expands beyond sports into economic indicators and other areas, it has the potential to change how traders access real-time data and make decisions.

By leveraging technology and focusing on user experience, Robin Hood continues to democratize investing and challenge traditional notions of how financial markets should operate. Their emphasis on education and empowering a new generation of investors points to an evolving landscape where more people have the tools and knowledge to participate in wealth creation through the markets.

Article created from: https://www.youtube.com/watch?v=6oRunfwDDPE