Why Susquehanna Is Building a Prediction Markets Business

Episode Summary

Executive Summary: This live Odd Lots conversation with Susquehanna’s Jeremy Mallett explores how prediction markets are evolving from mostly retail sports betting into potentially useful institutional hedging tools. The discussion centers on why market makers matter, how liquidity is bootstrapped, why regulated venues are different from crypto DeFi platforms, and what needs to happen for prediction markets to become a serious part of the financial system.

Main Topics: The role of market makers in prediction markets (Priority: 5/5): Mallett explains that Susquehanna provides liquidity across platforms and time horizons, bridging buyers and sellers when they are not simultaneously available. The firm sees itself as both a liquidity provider and an ecosystem builder. Institutional hedging as the next growth area (Priority: 5/5): The conversation focuses on whether prediction markets can move beyond retail/speculative uses into tools for corporations to hedge risks like weather, geopolitics, regulation, and supply-chain shocks. Bootstrap problem: liquidity, awareness, and infrastructure (Priority: 5/5): A major barrier is that institutions do not yet see enough depth in many markets. Susquehanna says it is willing to be the liquidity, but the ecosystem still needs clearer plumbing, intermediaries, and institutional comfort. Regulated markets vs crypto/DeFi prediction markets (Priority: 4/5): Mallett argues regulated venues with KYC and compliance offer better protection against insider trading than DeFi platforms, and that the DOJ and blockchain transparency help deter abuse. Market design, manipulation, and insider-trading concerns (Priority: 4/5): The discussion covers how suspicious flow can be detected, why some markets are more manipulable than others, and why Susquehanna avoids certain subjective or easily influenced contracts. Prediction markets as a faster way to launch tradable risk (Priority: 4/5): Mallett says the biggest innovation is speed-to-market: risks that once took a year to list as a future can now be launched on prediction markets in a day or less, enabling trading in new topics like compute and DRAM.

Key Arguments: Prediction markets need market makers because buyers and sellers often want to trade at different times and sizes; liquidity providers bridge that gap. Susquehanna is trying to bootstrap not just retail liquidity but institutional liquidity, because many potentially useful contracts are still too thin for serious hedging. Prediction markets primarily provide information and price discovery, so relatively modest volume can still produce a fair price usable for larger risk decisions. Institutions’ biggest hurdles are awareness, compliance, and legal uncertainty—not necessarily the underlying utility of the products. Regulated prediction markets are safer and more credible than DeFi platforms because KYC and oversight make insider trading easier to detect and punish. Insider trading is often easier to spot in prediction markets than in equities because event-based contracts have fewer legitimate reasons for trading. Some contracts are unsuitable for market making because they are too manipulable or depend on settlement mechanisms that can be influenced directly. The most important innovation of prediction markets is speed: they can bring tradable markets to emerging risks far faster than traditional exchange listing processes. Sports still dominate volume, but faster-growing non-sports markets and hedging use cases are expanding from a smaller base. Susquehanna’s role is partly to bring other institutions into the ecosystem by acting as a trusted facilitator and liquidity backstop.

Data Points: Show date: May 28 - The episode is from Odd Lots’ live show in New York City at City Winery. Live venue: City Winery, New York City - Recording location for the live episode. Liquid contract example: $150,000 in volume - Used to illustrate that some prediction-market contracts remain too thin for large institutional hedges. Market share of sports in prediction markets: More than half of volume - Mallett says sports still account for the majority of activity. Historical listing time for a future: About a year - Traditional exchange listing process referenced in his origin story for a trade idea. Prediction market launch time: A day or inside a day - He contrasts the speed of prediction markets with traditional listing timelines. Expected market reaction in 2016 election scenario: Down 5% to 7% - Broad consensus view cited for what markets would do if Trump won. Market move after 2016 election: Up by the next day - He notes the initial shock was brief and the hedge based on traditional proxies failed.

Pivotal Quotes: "We will be the liquidity." — Jeremy Mallett: Explaining how Susquehanna responds to institutions saying contracts are too thin to hedge. "Prediction markets really provide information, it's a price discovery mechanism." — Jeremy Mallett: Describing why even relatively low trading volume can still support useful pricing. "The real valuable thing that happened with prediction markets is the speed to market." — Jeremy Mallett: Summarizing why prediction markets matter beyond sports betting and election trading.

Implications: Prediction markets may increasingly serve as institutional hedging tools if liquidity, compliance, and trust improve. Their fastest path to relevance is through regulated venues, intermediaries, and market makers willing to seed depth in real-world risks.