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In July of this year, Polymarket paid Quadcode, the group behind IQ Option, $112m for its US-regulated entity QCEX.
That deal was not entirely cash based. Instead, Quadcode got some cash and equity in Polymarket as part of the transaction.
The main reason for that will have been a lack of cash on Polymarket’s part.
At the beginning of October, the company’s founder Shane Coplan said on X that the firm had raised $205m, prior to ICE announcing a $2bn investment in the firm.
Incidentally, the lead singer of the Red Hot Chili Peppers is also an angel investor in Polymarket – wut?
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Anyway, that would mean Polymarket was paying Quadcode more than 50% of all the funds it had ever raised to buy QCEX. Giving them equity would be easier.
This is obviously an insanely good deal for Quadcode.
If you look at the other deal like this that took place this year, it was Kraken buying Small Exchange for $100m from IG Group.
That deal was purely so they could use the exchange’s license to go and launch perpetual futures and (maybe) event contracts.
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The same was true of the Quadcode – Polymarket deal. The event contracts firm paid $116m in cash + equity just to get the infrastructure and regulatory permissions that QCEX had.
But then this makes you wonder, what even was the plan for QCEX?
Quadcode set up a US company in 2021 and appears to have had almost no meaningful US employees. Justin Hertzberg, who runs FPFX, appears to have been involved as a director at the firm.
However, being a director does not necessarily imply this was some kind of full time gig. You just need a local director – as I’m sure many of you with operations globally will know.
One of the only people that seems to have had some kind of full time role at QCEX was a compliance exec called Matt Childers.
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Childers worked at the National Futures Association for a decade before he took up the compliance role with Quadcode’s US firm in 2022.
He then helped them set up and get regulatory approvals from the Commodity Futures Trading Commission (CFTC) to operate a Designated Contract Market (DCM). This is essentially an exchange that you could use to offer trading in various derivatives products, including futures or event contracts.
Given Quadcode’s prior track record, it’s plausible they wanted to do something like Nadex and offer binaries.
However, they set up a US entity in 2021 – a year after Polymarket was launched and three years after Kalshi was established. Maybe they wanted to try and get into the same event contracts game?
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Whatever the case, it is hard to see the costs of setting up running anywhere close to $116m.
For example, Kalshi got approval from the CFTC in 2020 and had probably ‘only’ raised about $40m by then.
The bottom line is that Quadcode, most likely by luck, was in a position where it was one of the only firms with permissions to provide a hugely in demand service. Now it has a bunch of money and a stake in a company that is ostensibly worth $9bn, without including $2bn in cash holdings.
Good deal!
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Event contract market making
Another part of the growing interest in event contracts is the fact that all of them want to take the other side of bets.
This is something I find kind of funny because US firms are all going through these extremely convoluted, expensive exchange-based set ups just so they can b-book their customers via event contracts and perpetual futures, and all because the mafia (NFA, CFTC) won’t allow them to offer anything except FX on an OTC basis.
Anyway, Kalshi is doing this. Polymarket is apparently looking at it. We already spoke to Interactive Brokers earlier this year about how they do it as well.
One way to make money doing this is to just do regular buying and selling of individual contracts to capture spread. There is a $0.01 gap – a huge amount in percentage terms – between the buy and sell price on Polymarket contracts.
However, there are some more ‘fun’ ways as well, which you could actually see as a regular trader (better?) during the last US election.
When the election was taking place, Interactive Brokers’ event contracts market ForecastEx had two contracts – ‘will Kamala win’ and ‘Will Trump win’.
In theory, those two contracts should align in price. The odds of buying a ‘yes’ contract for Trump winning should match the odds of a ‘no’ contract for Kamala winning. But quite often that was out of line.
For example, if Trump ‘yes’ was trading at $0.60 then the Kamala ‘no’ should have been trading at the same price. But sometimes time there was a $0.01 – $0.03 gap between them.
If that happened you could buy Kamala ‘yes’ and Trump ‘yes’ for less than $1. In other words, you could buy both outcomes for less than the payout and keep doing it until the pricing gap closed.
I imagine that there are many more high IQ ways to play this than that but that seems like a fairly simple one and if you are some HFT nerds, like the Kalshi founders are, probably it’s pretty easy to set up some bot system that does trades like that all day long. On the other hand, they already have an API – so maybe other nerds are doing it too.
