A lot of people want to bet on SpaceX’s stock. A lot of other people want to bet against SpaceX’s stock. In approximately one week, the people who want to bet on SpaceX will be able to do so to their hearts’ content: SpaceX will be publicly traded, albeit with a fairly low float, and you’ll be able to buy as much as you want at some price. People who want to bet against SpaceX will also get more or less what they want at more or less the same time: Once SpaceX is public, you will be able to borrow shares and sell them short. 

On the other hand:

• A week is a long time, there will be a lot of SpaceX news in the next week, and a lot of people want to get their bets in now.
• Even in a week, not everyone who wants to bet on, or especially against, SpaceX will get exactly what they want. The supply of shares to borrow (for short selling) might be tight and expensive. Many current shareholders — employees, venture investors, special purpose vehicles — have lockup agreements that prevent them from selling their stock, or selling short to hedge, for months after the IPO. [1]  A more freewheeling, general-purpose way to bet against SpaceX stock might fill a need even once SpaceX is public. 
• Also, a more freewheeling, general-purpose way to bet against SpaceX might help people who want to bet on SpaceX, by creating more supply. The expectation now is that SpaceX will go public with a $1.77 trillion market capitalization but a free float — shares available to buy on the market — of only $75 billion. The rest of the stock will be locked up for at least several months. There could be, as it were, a bit of a squeeze to get into the stock: SpaceX’s market value will represent on the order of 2% to 3% of the entire US stock market, but its available float will be something like 0.1% of the market. If everyone wants to own SpaceX in proportion to its market weight, they won’t be able to; if they try, they will push up the price. But if, instead, they can buy SpaceX stock from people who want to bet against it — if the people betting against it could create new synthetic shares — then the supply squeeze would be eased.

A major theme of this column over the past year has been: That’s coming. Historically, a lot of people have had thoughts of the form “I would like to bet on the stocks of hot private startups,” and of the form “I would like to bet against the stocks of hot private startups.” Occasionally they have even launched public exchanges to facilitate it: You set up a website, people who want to bet on or against a startup can show up, and the website can pair them off against each other and facilitate their bets.

Historically the problem with this is that it is illegal under US securities law, and those platforms would be shut down. This was not a small accidental technicality. The main point of US securities law is that, if a company wants to sell stock to the general public, it has to register with the US Securities and Exchange Commission and disclose financial and business information. A platform allowing people to trade stocks of private companies — or trade synthetic bets on those stocks — gets around that requirement; it would be, as I wrote last month, “the end of securities regulation.” Well, what I wrote last month was “We seem to be reaching the end of securities regulation,” because those platforms are increasingly being built.

Here’s this:

Coinbase is expanding what it means to be the Everything Exchange by launching pre-IPO perpetual futures, a product category that gives eligible traders price exposure to private companies before they list on public markets. These are USDC-settled perpetual futures contracts, built on the same crypto-native rails traders already use. No equity ownership, no complex brokerage onboarding. Just the perpetual futures format you already know, applied to a new and exciting underlying asset class.

Our first listing is SpaceX, marking a milestone for new assets on Coinbase. Now eligible traders can get price exposure to SpaceX before it ever trades on a public exchange. …

Auto-transition at IPO: when SpaceX completes its IPO, positions automatically transition to the SpaceX Perp. No action required. No disruption. Continuous exposure from private to public.

The advantage of this, this week, is:

1. If you think that SpaceX will go public at $135 per share and immediately trade up — as IPOs often do — then you can effectively buy exposure now and profit from the IPO pop. [2]
2. If you think that SpaceX will go public at $135 per share and immediately crater — because that’s just too much stock at too high a valuation — you can sell exposure now and profit from the IPO collapse.
3. If you own SpaceX stock and want to hedge your exposure — if you want to take some risk off now, rather than in six months when the lockups expire — maybe you can? I mean, my impression is that the lockup agreements technically prohibit selling SpaceX perpetual futures on Coinbase. But who is going to check? The blockchain is a somewhat lawless place.

The advantage of this, next week, is that it will roll into synthetic SpaceX stock. Is owning synthetic SpaceX stock as good as owning regular SpaceX stock? Meh, arguably it is comparable, and it comes with more leverage. But shorting synthetic SpaceX stock might be better than shorting regular SpaceX stock: It’s harder to get short-squeezed, you can’t lose stock borrow, and if you are violating your lockup agreements with SpaceX maybe nobody will notice.

Anyway, we are not quite at the end of securities regulation yet, because this is all still illegal under US law, and Coinbase’s pre-IPO perpetual futures are “not available to US persons.” But Coinbase is a big US-listed US-regulated company with designs on becoming a general-purpose financial exchange; why wouldn’t it want to offer stock trading? Even private stock trading.

In that vein, let’s talk about prediction market prime brokerage. I wrote last month about Polymarket’s new offering of prediction markets on private company valuations. Those provide a way to, approximately, trade shares of private companies without any securities registration or disclosure. Not like Coinbase — not with perpetual futures — but with binary yes/no bets on whether a private company will exceed a given valuation by a given date. Again, this is not technically available to US users, though I’m not sure how much anyone cares.

The logical end of this is something like “private companies can raise money, without registering to go public, using prediction markets.” How might that work? I suggested that an investor who owns stock in a big private company could go to Polymarket and sell a “Will [company]’s valuation hit [amount] by Dec. 31” contract for roughly the notional amount of her stock. If you own $96.5 million of Anthropic stock at its current $965 billion valuation, you sell 100 million “Will Anthropic hit $1.1 trillion” contracts at their current price of around 93 cents each. [3]  You get $93 million now. If the contract settles to “Yes” (if Anthropic’s valuation hits $1.1 trillion), you owe $100 million on the contract, but your stock is worth at least $110 million at that valuation, so you sell some stock for $100 million, deliver it to settle the contract, and keep your initial $93 million (plus whatever stock you have left). Effectively you have presold your stock at $93 million. [4] If the contract settles to “No” (if the valuation is below $1.1 trillion), you keep the $93 million and the (perhaps somewhat less valuable) stock.

If investors could do this, then it would effectively be a public fundraising mechanism for private companies. A company could sell $100 million of stock to an institutional investor in a private placement, and the institutional investor could turn around and sell $100 million of ever-so-slightly-out-of-the-money prediction-market valuation contracts on the company to hedge and fund its investment. The institutional investor would essentially be a conduit, and the company would ultimately be raising money from prediction markets.

There are huge problems with this theory, which I will get to below, but I do want to point out a nice thing about it, which is that it is positive-sum. “Growing private companies might be able to raise money from retail gamblers in prediction markets” is a strange but effective response to my main complaint about prediction markets, which is that they are necessarily zero-sum gambling. When you buy stock, you are investing; you are using your money to finance economic growth in exchange for a share of that growth. When you buy a Polymarket contract on “will the Knicks beat the Spurs,” you are not investing; any money that you make has to come from people betting against you. But if the people betting against you are companies that use your bets to finance economic growth then, you know, hey, great.

But let’s talk about the problems with this theory. I can see three big ones, two of which I will deal with quickly:

1. This is, like, ludicrously illegal? Like, come on, man. Buying stock in a private placement and turning around and selling retail investors binary options on that stock’s price raises all sorts of problems. (“Underwriting,” “dealer,” “security-based swaps,” others.) But, again, we are coming to the end of securities regulation, so this might not matter.
2. Liquidity in these markets is very small, and you couldn’t really sell $100 million of anything. (That Anthropic $1.1 trillion contract had like $92,000 of volume as of this morning.) Presumably that will grow over time, but it is probably fanciful to think that there will ever really be hundreds of millions of dollars of liquidity here. 

The third problem, though, is that my description of how prediction markets work is mechanically wrong. You don’t “sell” 100 million “Anthropic hits $1.1 trillion contracts” for 93 cents each. You can’t sell event contracts that you don’t own; your position on a prediction market can only be an asset, never a liability. Instead, if you want to make that bet, what you do is buy the “No” contract. You pay money up front; you don’t receive money. The “No” contract costs about 10 cents (there’s some friction, so Yes plus No is not perfectly $1), so you’d pay $10 million upfront. If Anthropic’s valuation hits $1.1 trillion, you lose the $10 million, but you keep your stock, which is now worth at least $110 million. If it stays below $1.1 trillion, you collect $100 million ($90 million net, after the upfront premium).

That’s roughly the same ultimate economic outcome that I laid out: You presell your stock on prediction markets while retaining some upside. As a hedge for investors in private companies, this works.

But it’s not a good funding mechanism. You get the money when the contract settles, not when you enter into it. You have to come up with the money to buy the stock in the first place (and the “No” contracts to hedge it). You are not a pure conduit for funneling retail prediction-market gamblers’ money into private companies: You put up the money, and the prediction-market gamblers sell you some insurance.

On the other hand, you could go to a bank with a certain taste for adventure and say: “Look. I’ve got some stuff. I’ve got $96.5 million of stock in a hot private startup that is hard to sell, and I’ve got these Polymarket contracts, which will pay me $100 million if the stock turns out to be worth less than $110 million. You don’t know what the stock is worth, and you don’t know what the Polymarket contracts will pay out, but you know that the package — stock plus event contracts — will be worth at least $100 million in any future state of the world. I will give you the package as collateral for a loan. The collateral is certainly worth at least $100 million, and therefore you should be happy to lend me, like, $99 million against it at a near-risk-free interest rate.”

The bank might say yes? (No, the bank will probably say “uh what about Polymarket’s credit risk,” but let’s just bracket that for now! [5]  In my imaginary world in which Polymarket event contracts are important financial infrastructure, maybe Polymarket is too big to fail.) And then you’re in business. Then prediction markets can be used to hedge and fund private equity investments.

Again, this is all quite hypothetical. It requires someone to get into this funding business: Banks or other financial intermediaries, or prediction markets themselves, will have to lend money against prediction market contracts. I’ve written about this before. Really what you’d want is some sort of cross-margining model, a model that understands that a package of Anthropic shares plus Anthropic-below-$1.1 trillion contracts is safer than either asset on its own.

Or whatever else you’ve got: Traditional oil futures contracts plus oil-below-$X event contracts, traditional oil futures plus Trump-announces-ceasefire contracts, Treasury bonds plus Kevin Warsh mention markets, Labubus plus short Labubu event contracts, anything that is negatively correlated with anything else. The prize for prediction markets would be to integrate themselves enough into traditional financial markets for this to work, for investors to use prediction-market contracts as hedges for their risks in traditional financial contacts and for banks to lend them money against the combination.

In that vein, here’s a story this week from Bloomberg’s Bernard Goyder:

Crypto finance conglomerate Galaxy Digital Inc. has launched a trading desk to offer large investors better access to prediction markets via over-the-counter derivatives similar to those used in markets from interest rates to commodities.

Galaxy Trading Mercury, a Galaxy subsidiary, entered into a $10 million wager in May with crypto hedge fund Arca on whether or not the Digital Asset Market Clarity Act of 2025 will pass through Congress, executives at the company confirmed in an interview. The parties used an over-the-counter (OTC) event swap, a bilateral version of contracts that are already common on prediction markets like Kalshi or Polymarket. …

Over the counter swaps rely terms laid out in a boilerplate agreement created by the International Swaps and Derivatives Association (ISDA), known as the ISDA Master Agreement. By using existing ISDA agreements, Galaxy’s clients don’t have to deal with the logistical and legal headaches around connecting to a prediction market exchange. There could also be credit concerns if the exchange is situated in an unfamiliar jurisdiction. They will, however, have credit exposure to Galaxy itself.

My impression is that this trade does not involve financing — the counterparty is just paying the full price of the contract upfront, same as it would on Kalshi — but the fact that it is done under an ISDA means that it could pretty easily be extended to allow financing. Or here’s a Y Combinator launch from last month: “River Markets is the prime broker for prediction markets.” Again, it doesn’t seem to offer leverage — it’s more about order routing and management — but we’re getting there. 

And here is a post from Kalshi yesterday about perpetual futures, which Kalshi launched last week. So far, Kalshi’s perpetual futures product is on crypto, not stocks (or event bets generally), but it is still an important evolution. What I have said about prediction markets is that, because they collect their bets upfront, they do not need to have any sort of margining or credit system: Kalshi sells a package of one Yes bet and one No bet for at $1, and then pays off $1 to the winner, so it never needs to ask the loser for more cash. This is good and easy for a consumer betting site, but it is not ideal for an “everything exchange,” for an institutional platform for hedging financial claims. But perpetual futures are, sort of by definition, highly leveraged products. You need to build a margining system. “We price the future. Now you can lever it,” Polymarket posted about its own perpetual futures plan. Perhaps that really is the future.

This is extremely not legal advice, but here’s how I understand prediction market insider trading. It is not illegal to trade on material nonpublic information that only you have; the point of prediction markets is to get people to develop and use proprietary information. Rather, it is illegal to trade on material nonpublic information that you got from your job, or that you otherwise had some duty to keep confidential. In April, a US Army soldier was indicted for allegedly insider trading on military plans on Polymarket. He “had a duty and obligation to maintain the confidentiality of the information he acquired, a duty he breached by misappropriating the information and using it to trade,” the US Commodity Futures Trading Commission said. Similarly, the former Google employee charged with insider trading on Polymarket “owed a duty of trust and confidence to Google to maintain the confidentiality of [its] information and not use it for personal gain.”

This is standard stuff; I often say that “insider trading is not about fairness; it’s about theft.” This is especially true in commodities law, which covers prediction markets; oil companies are free to trade oil futures even if they have material nonpublic information about their own production plans.

So what about this then:

In February, four months after being released from federal prison, former Republican congressman George Santos took to social media to express his enthusiasm about attending President Trump's upcoming State of the Union address.

“I’m going to be there for the State of Union in the gallery, guys,” Santos said in a video he posted to X a day before the president’s remarks.

At the time, traders on the prediction market site Kalshi were placing millions of dollars worth of bets on who would attend. Santos’ video confirming his presence sent odds soaring.

But he didn’t show up. …

What Santos didn't say was that he had already placed bets on Kalshi that he was not going to appear at the State of the Union address, according to three people with direct knowledge of his trades who were not authorized to speak publicly. They say Santos misled the public and turned a profit based on that deception in the tens of thousands of dollars.

Great, sure. Every headline about this says “insider trading,” but I don’t think this is insider trading? Santos had no obligation of confidentiality to anyone to keep his State of the Union plans confidential; therefore he was free to trade on them. Or perhaps I am wrong; this is all a very new and stupid area of law. But I think I’m right.

That said,  Kalshi seems to disagree; it bans insiders — probably including Santos — from trading on mention markets like this. Does violating Kalshi’s terms of service constitute criminal insider trading? Maybe! We might find out.

Also, while I think he was free to trade on his secret State of the Union plans, was he free to lie about them? I mean, to lie about them and trade on them? I do think that announcing that you’re going to the State of the Union to push up the “Yes” price, buying “No” contracts and then not showing up seems like a pretty textbook case of market manipulation. You are not allowed to, “in connection with any swap” (including an event contract), “make … any untrue or misleading statement of a material fact,” or “deliver … a false or misleading or inaccurate report concerning crop or market information or conditions that affect or tend to affect the price of any commodity in interstate commerce.” Sadly, “George Santos showing up at the State of the Union” is now a commodity in interstate commerce, so delivering a false report about it is commodities fraud. 

“Direct indexing” means, instead of buying an index fund that buys all the stocks in the index, you buy all of the stocks in the index yourself. This used to be pretty difficult for a retail investor, but with the rise of, like, computers and zero-commission trading and fractional shares, it’s now reasonably easy, and there are companies that will do it for you with fairly low minimum investments. One reason to direct index is tax efficiency; you can tax-loss-harvest your losers when you own them all directly.

But the other main reason is that you can almost index. You can buy, like, 499 of the 500 companies in the S&P 500. Direct indexing allows you to construct all sorts of portfolios that start with the index — that start from the presumption that you should just match the market portfolio — but give it a little tilt. The little tilt can be economic (you think that financial firms will underperform so you keep them out of your direct index), or environmental/social/governance (you think that coal is bad so you don’t buy the coal companies), or whatever else strikes your fancy. You are not beholden to an index provider’s decisions. You can take the index that they give you and make whatever changes you want.

You see where I’m going with this. I wrote yesterday that there seems to be a lot of demand for index funds that won’t include the big artificial intelligence companies planning to go public this year, and several people emailed me to point out that not only can you get this (or whatever else you want) with direct indexing, but also that Frec, a direct indexing firm, has specifically jumped on the opportunity. Its chief executive officer posted on LinkedIn this week:

Many customers have reached out about preemptively restricting SpaceX from their direct indices.

As of today, customers can add a trade restriction against SPCX so Frec will not open a position. They will also be able to exclude it from any index that adds it. …

The broader point is that ETF investors outsource all decisions to fund managers and index providers. When an index changes, they generally have to accept the new exposure and have no say.

Direct indexing gives investors more control. They can restrict individual securities, customize their exposure, and participate in markets in a way that better reflects their own preferences. 

My view is that the point of passive investing is to give up control, but I concede that this is a good pitch!

Supreme Court Bolsters SEC’s Power to Recoup Illegal Gains. ( Earlier.) Goldman Erects Lobby Rockets as Morgan Stanley IPO Rivalry Heats Up. SpaceX IPO Sells Rocket Business Hype in 17-Minute Video Pitch. The Mortgage Hedging ‘Beast’ Is Returning to the Treasury Market. Blackstone’s BCRED Caps Redemptions After Investors Seek 10%. Bill Ackman’s Pershing Square Set to Make $600 Million on Universal Stake. DE Shaw Extends Client Exit Time to 4 Years, Shuts Two Funds. Broadcom Slides by Most in More Than a Year on AI Outlook Miss. The Crypto Winter Turns Colder as Bitcoin Extends Its Slide. Banks Offload $1 Trillion Loan Risk to SRT Investors, IACPM Says. French Billionaire Pleads for Law Change to Disinherit Children. China Uses LinkedIn to Lure Spy Recruits in West, U.S. and Allies Warn.

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