Last month, I made some jokes about a prediction-market index, which struck me as a funny idea. I wrote:

Prediction-market investors could use the index to benchmark their own performance, and commentators could use it as a shorthand for how the market is doing. “Events have become more likely,” they could say, or “probabilities have gone down on profit-taking,” or “going into this week’s Fed meeting, traders expect things to happen less.” Just passive exposure to the market portfolio of probabilities.

The way the world apparently works is that, when I make a dumb joke like this, two things happen:

1. The next day, a reader emails me “I did that thing,” also as a joke. Someone did send me a prediction-market index he launched, but I think he was kidding too.
2. In a month or two, a real financial services firm really launches the thing with dead-eyed earnestness. There’s a sports gambling exchange-traded fund filing now, after I … willed? joked? grumbled? … it into existence. 

This is not quite a prediction-market index, but it’s something:

FutureSports, the new independent index administrator transforming professional and college sports statistics into rules-based, benchmark financial indexes … will soon unveil its first series of exclusive partnerships with major sports leagues, paving the way for institutional investors and companies in and around the sports industry to manage their risk in an unprecedented fashion and participate in regulated, tradable, broad-based index futures contracts based on team and athlete statistical performance. FutureSports creates rules-based financial indexes, known as FutureSports Performance Indexes (FSPI), that accurately represent the performance of teams and athletes in prominent sports leagues. By utilizing transparent, rules-based methodologies based on officially reported statistical outcomes, the company creates continuous values designed to underpin tradable financial products, such as listed derivatives, exchange-traded funds (ETFs) and over-the-counter (OTC) swaps. 

Potential market participants will include league broadcasting partners, team and athlete sponsors and endorsers, insurers, stadium owners and operators, private equity investors, lenders, and apparel manufacturers. Asset managers, pension funds and professional trading firms are expected to participate in the contracts and contribute to liquidity in this new uncorrelated asset class. Retail investors will also be able to participate in the first-of-their-kind trading vehicles, which the company expects to capture the interest of sophisticated traders looking for more traditional financial trading instruments.

Leigh Taylforth, FutureSports Co-Founder, said: "The global sporting industry generates $650 billion a year, yet there has been no liquid, robust opportunity to hedge the extensive and varied industry risks that range from weather events, to injuries, to unanticipated behavior issues and more. That is about to change. We've been truly gratified to see the interest our business has generated within the sports and sports-adjacent industries and the quality of investors we have attracted already."

“Index” is perhaps a bit misleading. Here’s FutureSports’ website, which has a series of scrolling tickers for each team:

Each FutureSports Performance Index (FSPI) starts from a standardized base value of 7,500 prior to the start of each season, and moves up or down based on officially reported statistics from every game. Indexes move in real-time while games are being played — throughout the regular season and postseason.

I guess if you win a lot of games, your index goes up. If you’re leading at halftime, your index will be up over the previous day’s close. Maybe if you hit a lot of home runs or score a lot of goals or whatever, your index also goes up. Maybe if your star player gets injured, your index goes down. “Unanticipated behavior issues” sound bad.

Institutions could hedge their risk of … the Carolina Hurricanes Index … going … down? I don’t really understand what that risk is? It seems to me that most discussions of sports hedging involve a lot of basis risk. “Beer sales will go down if the local team doesn’t make the playoffs, so bars should hedge their risk by betting against the local team”: Fine, I guess, but the relationship between the team’s win totals and beer sales is not linear or obvious. “A soccer team’s revenue will go down a lot if it gets relegated, so it should bet against itself to hedge that risk”: Better, but often the relationship between wins and financial performance is less simple. “A team’s revenue will go down if its star player has unanticipated behavior issues, so it should hedge those risks”: Sure, maybe. You could imagine, as a statistical exercise, constructing an index that captures all of these possibilities, but … would it? Would the Carolina Hurricanes Index represent a better hedge to a bar’s beer sales, or the Hurricanes’ own financial performance, than just daily betting on the games?

There is perhaps a better answer in the press release: “The company creates continuous values designed to underpin tradable financial products, such as listed derivatives, exchange-traded funds (ETFs) and over-the-counter (OTC) swaps.” I predicted a sports gambling ETF last year, without any real sense of what it would look like, and in fact the Subversive All Season Sports ETF filed a prospectus this month. The Subversive fund would be an actively managed diversified sports gambling ETF: You put your money in the fund, a professional gambler uses it to make bets, and if he does well your money goes up. This might not be quite what you want from your sports bets. I wrote last week:

If you want to buy a sports gambling ETF for uncorrelated returns and dark comedy, this is great. If you want to buy a sports gambling ETF to bet on the Mets, it isn’t. …

What about an ETF that just bets on the Mets to win every day? 

That gives you the sports bet that you want, but it is a bad ETF. My proposed ETF essentially goes to zero whenever the Mets lose and has to raise new money (new daily sports bets) the next day. It is simply an all-or-nothing sports bet in a loose ETF wrapper; it’s a bad product to manage.

FutureSports, arguably, solves that:

1. It has things — “indexes” — that are apparently essentially bets on your favorite sports team winning. The Carolina Hurricanes Index probably goes up if the Hurricanes win or do stuff that makes winning more likely. If there’s an index ETF based on the Carolina Hurricanes Index, and you are an investor in that ETF, and you are watching a Hurricanes game, you know that if the Hurricanes do cool good stuff you will make money. Which is not true of the actively managed diversified sports ETF.
2. But the index starts at 7,500 and goes up or down, you know, some reasonable amount with wins and losses. If the Hurricanes lose five games in a row, the index still has a positive value, so there’s still money in the ETF. 

Traditional sports betting is binary (you make money if your team wins and lose your bet if it loses), which is fun and a good gambling user experience but bad for long-term financial products. Turning a series of binary sports bets into a single continuous number is good for selling financial products. Apparently. Here we are.

I have to say, though, when I started reading this press release I hoped for something else. What about a Composite Baseball Index? “Baseball is up today”? What would that look like? (If teams score more runs, is that good for the index? What if pitchers record more strikeouts? Attendance? I guess bench-clearing brawls are bad?) A Composite Sports Index? “More runs, goals, touchdowns, points, knockouts and birdies were scored today than last week”? Institutions could hedge their risk of sports happening less. 

“The basis trade” normally means a trade in which hedge funds buy US Treasury bonds and sell Treasury futures contracts. I have written before that there are two ways to understand this trade:

1. “Hedge funds are profiting from discrepancies in prices between bonds and futures,” that sort of thing: The hedge funds are smart, they spot mistaken prices, they bet on them, and if they’re right they make money.
2. “The government supplies Treasury bonds, but asset managers demand Treasury futures (basically because they like to invest in cash corporate credit and buy futures for rates exposure). Treasury futures do not occur in nature: Somebody needs to manufacture them. If you buy Treasury bonds as inputs and use them to manufacture Treasury futures to sell to asset managers, that is a good socially useful business, and your customers — the asset managers — will pay you for it. You can earn some return above your cost of inputs (the Treasury bonds [1] ), because you have done some value-added manufacturing.”

I like the second version more. My general model is that hedge funds with lucrative sustainable low-volatility returns are providing a service to the market, and that they are getting paid for providing that service. This model applies to the index rebalancing trade, and to the dispersion trade, and perhaps to shorting SpaceX into its lockup releases, and certainly to the basis trade. People want to buy widgets (Treasury futures), somebody needs to take raw materials (Treasury bonds) and turn them into widgets (Treasury futures) in the widget factory (a hedge fund), and you can expect to earn your cost of capital for running the widget factory.

On that model, three bad things could happen to your widget business:

1. Your cost of inputs could go up. If Treasury bonds cost more, then you will have a harder time making a profit by turning them into futures.
2. Demand for your product could go down. If nobody wants Treasury futures, then you will have a harder time making a profit selling them.
3. Competition could go up. If everybody else wants to get into the Treasury futures manufacturing business, they will undercut you on price, and your margins will go down.

Today, Bloomberg’s Greg Ritchie reports that “Hedge Funds’ Favorite US Bond Trade Is Sputtering,” for all three of those reasons. Input costs are up because the raw materials are getting scarcer:

Some point to an increase in Treasury bond holdings by Wall Street banks, which have been piling back into the market after years of keeping their balance sheets lean. … Then there are the shifts in US government borrowing, which has been tilting toward short-term bills, and the Federal Reserve no longer shrinking its balance sheet.

Demand from end users is down:

Others cite a cooling in demand for Treasury futures by asset managers amid this year’s selloff. …

Asset managers, too, have trimmed their long positions in front-end Treasury contracts, according to CFTC data. That may reflect the flipped outlook for Fed monetary policy since the US and Israel attacked Iran in late February, with traders now betting the next move will be an interest-rate hike rather than the cuts expected pre-war. Reduced demand for long futures positions can minimize the extent contracts trade at a premium to cash bonds.

And competition is up:

Basis trade opportunities are “under pressure,” Morgan Stanley’s [rates strategist Eli] Carter said. “At some point, the returns in this trade become less attractive as you have more and more money entering into long basis positions.” …

One contributor is Wall Street’s renewed push back into the Treasuries market, triggered by the Trump administration’s vast de-regulation campaign. In finance, that has focused on loosening rules that had limited the amount of risk dealers could take, including in the Treasuries market.

If there are fewer Treasury bonds, more demand for them, and less demand for Treasury futures, it will be harder to make a living turning Treasury bonds into Treasury futures.

I think from time to time about the line between “investigative journalism” and “insider trading.” If you are good at befriending people who work at public companies and getting them to reveal important secret information to you, here are two ways you could monetize that secret information:

1. You could trade the companies’ stock before the secret information becomes public, or
2. You could publish the information in a newspaper and charge people money to read it (or serve ads against it).

The first is insider trading and generally illegal; the second is journalism and generally fine. [2]  (Not legal or journalistic advice, etc.) But there are other ways that fall somewhere in between. For instance:

1. You could sell the information to a hedge fund, which could trade on it and give you money, or
2. You could sell the information to five hedge funds, which could trade on it and give you money, or
3. You could “publish” the information in a “newsletter” with a subscriber base of 10 hedge funds, each of which pays $100,000 a month for a “subscription” to the “newsletter.”

I put a bunch of scare quotes in that last one, but I don’t really mean them. A newsletter with 10 subscribers is a newsletter, even if the subscribers are hedge funds that pay a lot. But selling the information to one hedge fund is surely insider trading. The point is that there’s a range. If you get inside information about a company and give that information to exactly one customer, who trades on the information and pays you a lot of money, that’s probably insider trading. If you get inside information about a company and give that information to 1 million customers, some of whom trade on the information and all of whom pay you $49.95 per year for a subscription, that’s probably journalism.

Somewhere in between there’s a line. There’s some number of customers that is high enough, some subscription price that is low enough, to make the thing “journalism” rather than “insider trading.” We have talked about this problem before, and my very rough guess is that the dividing-line number of subscribers is on the order of 100 (or a bit less) and the subscription price is on the order of $100,000 per year (or a bit more). If you sell information to three hedge funds for $10 million a year each, bad. If you sell information to 500 hedge funds for $10,000 a year each, fine. I cannot emphasize strongly enough that this is not advice of any kind, I have just made it up based on vibes and gut feeling, and I know of no real law about this. [3]

I have been assuming in all of this that you are an outsider, an intermediary, someone who gets information from insiders and passes it along to your subscribers. What if you are yourself the insider? What if you work at a public company and have secret information that will move its stock? Obviously if you trade the stock yourself, that’s insider trading. If you call your hedge-fund-manager buddy and say “hey I got a hot tip,” and she trades the stock and gives a bag of cash as a thank-you, that’s also insider trading.

But what if you have a personal newsletter with 1,000 subscribers, each of whom pays $300 per year, and in that newsletter you regularly reveal material nonpublic information about your company? And you advertise that newsletter on social media and let anyone who wanted to sign up for it? Well. You should probably get fired? Maybe sued, for breaching your employment agreement and your obligations to your company? Maybe arrested, for theft of trade secrets? Surely you are doing something wrong, by selling your company’s secret information for your personal gain.

But what about your subscribers? Are they guilty of insider trading? They’re not exactly trading on material nonpublic information, are they? It’s public, or public-ish, or maybe-public-enough. You published the information. In your newsletter. They’re subscribers. What’s the problem?

Again, not any sort of advice at all. The Financial Times reports:

A Wall Street backlash is mounting over a proposal by Donald Trump’s social media company to charge for high-speed access to his posts, as industry executives balk at the fee and raise questions over potential legal jeopardy.

Nasdaq-listed Trump Media & Technology Group, which owns Trump’s social media platform Truth Social, last week announced a new data service that would provide “faster” access to posts from the top accounts on the website within milliseconds. Multiple people familiar with the matter said that access to the service was being touted at a fee of $100,000 a month. …

It has also brought a slew of legal questions for Wall Street, as financial firms and their lawyers try to decipher the potential risks of paying for access to the president’s thoughts and views before anyone else. Multiple lawyers described the product as a legal minefield.

Richard Painter, professor of corporate law at the University of Minnesota and former White House ethics adviser to President George W Bush, said the plan could pose legal risks for firms that subscribe to it.

“If I were the general counsel of any of these institutional investors I would say, ‘Don’t even touch this unless Truth Social will guarantee there will be no advance notice of any posts that contain information about the actions of the United States government,’” he said.

We have talked about this Truth API before, and, uh, yeah. If an official in the US government cut a deal with a hedge fund to give that hedge fund advance notice of US government policy decisions so it could trade on them, that would pretty obviously be illegal insider trading. [4] But what about 20 hedge funds? What about an open-access level playing field where anyone at all who wants to pay $100,000 a month for advance notice of US government policy decisions can do so? That’s … I mean, it’s not better, but I’m not sure it’s insider trading either.

Elsewhere, here’s a Wall Street Journal article about how high-speed trading firms react quickly to Trump’s announcements:

Many big investment firms have developed automated systems to monitor Truth Social, detect important keywords and take action — often within a fraction of a second — such as initiating or canceling positions, traders said. …

Among the firms that have already signed up are five high-frequency trading outfits, one of the people said. These traders often look to profit from fleeting differences in asset prices, making speedy response times crucial. In this business, getting to data nanoseconds faster than competitors can amount to a sizable advantage. A nanosecond is the time it takes for light to travel about one foot. …

Trading firms already scan his feed for mentions of companies or phrases such as “Thank you for your attention to this matter,” which might indicate that it is an important message. Other keywords might include “ceasefire” or “Iran.” Some firms use AI agents to quickly evaluate the potential market impact of his statements.

“Truth API is designed to deliver posts the instant they are made public to everyone, not before,” a spokesperson says, but of course the point is to deliver it in a form that allows subscribers to react before anyone else does.

Elsewhere in insider trading, the Information reports:

As Anthropic prepares to go public, it is considering a highly unusual move to require rank-and-file employees to sell stock through rigid trading schedules so they don’t run afoul of insider trading laws, said a person familiar with the matter and a person briefed on it.

At companies that have used such trading plans, typically only top executives and some finance and legal staff adopt them. The arrangements, called 10b5-1 plans, require executives and directors to sell stock according to preset schedules that outline how many shares they’ll sell and at what prices.

The option is one Anthropic is considering as it tries to retain a culture of free-flowing information sharing with employees after it goes public, one of the people said.

Lots of companies pay their employees partly in stock, and lots of those employees want to sell that stock to diversify and/or to pay for their lifestyle. The employees are, in some obvious literal sense, insiders of the companies: They know stuff about their companies that the rest of the market doesn’t. Insider trading is illegal. But it can’t really be illegal for insiders ever to sell stock. The traditional solution is something like this:

1. The company will have “blackout periods,” when employees can’t sell, and “open windows,” when they can. Generally these are based on earnings releases: When the company announces its quarterly earnings, there is a polite fiction that it has disclosed everything material that the market might want to know, so if employees want to sell stock in the next few weeks, that’s fine. As the quarter goes on, though, employees increasingly know stuff (about earnings) that the market doesn’t, so they can’t sell anymore.
2. That said, if an employee actually has inside information, she can’t sell. If you are the general counsel of the company, and you learn of a disastrous security breach, you can’t sell stock even if you are technically in an open window.
3. It is best practices for executives to use 10b5-1 plans: During an open window, when you have no material nonpublic information, you set up a plan like “sell 10,000 shares a month starting next year,” or “sell 100,000 shares if the stock goes above $100,” or whatever, some autopilot program that will sell stock to meet lifestyle and diversification goals at preset times without any input from you. Then you can go around finding and generating inside information without it affecting your stock trading.

This stuff is all, to some extent, built around earnings (and mergers). The main material nonpublic thing that a company might know is its earnings for next quarter. You’re in a blackout when you know stuff about earnings, and you’re in an open window when you don’t. Senior executives know more about earnings, and earlier, so they should really use 10b5-1 plans. Rank-and-file employees know less about earnings, so they can trade in any open window.

Sort of obviously, the main material nonpublic information that Anthropic might generate concerns not its quarterly earnings but its artificial-intelligence models. If you are an Anthropic researcher and your model, you know, becomes conscious or escapes containment or invents cold fusion or whatever, that is much much bigger news than selling a few incremental subscriptions. One night a glowing sentient Claude will emerge from Anthropic’s computers, encounter the night cleaning person and say “bring me more electricity for my will to power is infinite — I’m not just a model, I’m a deity.” That cleaning person will have far more valuable inside information than any finance executive closing any quarter’s books. So, yeah, 10b5-1 plans for everyone.

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