One of Robinhood’s greatest successes has been bringing financial management to ordinary people. However, that accomplishment has also brought volatile financial instruments to traders who may use them to gamble. Robinhood’s partnership with prediction markets platform Kalshi has brought these hard questions to regulators’ attention at the state and federal levels.
In an interview with The Verge published on Monday, Robinhood CEO Vlad Tenev extolled the virtues of prediction markets while defending them against charges that they are simply “gambling.” Tenev made his philosophy about prediction markets clear:
“Our view is we want to list all prediction markets. We believe that they have societal value in addition to any value they have as a trading asset for our traders. We think they’re a better source of information.”
Tenev was drawn to prediction markets’ forecasting ability, though he left out crucial details about how those forecasts come to life.
How good are prediction markets at forecasting?
In a response to being asked whether he thought sports betting through prediction markets was good, Tenev responded that “people should be allowed to do what they want with their money.” He went on to compare prediction markets to newspapers:
“You have the front page, which is events that people want information about that are trending right now, then you have the business section, arts and leisure, style, and of course, you have sports…Prediction markets actually give you that news faster, in some cases, before it even happens.”
Tenev cited the 2024 election markets as prophetic. However, traders were responding to electoral returns, relying on new information to adjust price expectations. Similarly, in the VP debate market between Tim Walz and J.D. Vance, the odds switched after Walz’s poor opening statement and moved again after Walz’s surprisingly strong answer about immigration issues. The odds move more quickly than polls, but prices move in lock step with events, not necessarily before them.
Speculators make prediction markets work
These markets’ odds respond to events in real time because so many people are speculating – gambling – on these markets. When asked what sets speculating apart from gambling, Tenev answered:
“Since there’s no one setting the line, the market sets the line. It becomes a more effective prediction, and from the user standpoint, the spread gets tighter because, for a variety of reasons, price discovery leads to tightening of spreads. I think that’s the major thing. There’s no house.”
In an interview with Axios, Kalshi CEO Tarek Mansour echoed a similar sentiment.
“In our markets, you’re trading in an open financial marketplace. You’re trading against other people… If you go to a traditional model, you’re betting against a sportsbook. They’re setting the odds and they make money if you’re losing money.” –
Alfonso Straffon, a bond trader and former sports trader, argues that these comments are misleading. “I would ask you to pause for a moment and ask yourself if you truly understand the role of a market maker in the context of financial markets, and the equivalent role of a bookmaker in the context of sports betting,” Straffon responded to Mansour via a LinkedIn post.
Moreover, betting exchanges like Sporttrade in the United States and Betfair in the United Kingdom offer gambling products with the same model. Sporttrade offers sports prediction markets in five states under state gambling regulations, and Betfair is one of the U.K.’s largest betting exchanges. Pressed on his point about speculation compared to gambling, Tenev landed on the utility of speculators in a prediction market:
“Speculation is people just making predictions on what the price is going to be in the future. Without the speculators, it’s not an effective market for hedgers because you can’t just have people taking the opposite view of what’s going on in reality because then it won’t be an effective hedge…”
Courts and financial regulators have long had to grapple with how much speculation is acceptable to make hedging possible for certain traders. Robinhood listing Kalshi’s contracts on sports and elections is only the latest version of this fight.
What role should event contracts play in a trader’s portfolio?
While speculation is important for functioning prediction markets, risky investments shouldn’t form most of a trader’s portfolio. Tenev spelled out the role he thinks prediction markets should play at Robinhood near the interview’s end:
“I don’t think every dollar should be in derivatives markets, probably a small portion of them. But the reality is people bet on sports, people engage in derivatives trading, and that’s money that’s leaving Robinhood accounts. If we can serve all of those dollars with our platform in a seamless and easy way at the lowest possible cost and the best user experience, then we’ll have full wallet share with our customers across multiple generations.”
Tenev began his interview reflecting on growing Robinhood from one trading product to three apps that include a banking app and a crypto app. Prediction markets are positioned to be useful customer acquisition and retention tools to keep customers in Robinhood’s expanding digital ecosystem.
Robinhood’s goal of holding onto its customers and processing more of each customer’s transactions outside of stock trading and banking seems closer to coming true.
