Liquidity on prediction markets is horrible. The reason: There is little algorithmic market making. It's responsible for 99% of liquidity in the crypto and stock markets, but barely exists for prediction markets. Here are 3 reasons why MMing on Polymarket is a fool's errand: 1. One side of the market certainly goes to zero Prediction markets are binary options that always make the shares of one side of the market ending up worthless. Either YES or NO certainly goes to zero, and here's why that's a problem: A key risk for market makers is inventory risk. If you market make for an asset, it's impossible to not at some point end up with a slight exposure to one side (YES or NO). Market makers always make money if the price of an asset goes sideways. They lose money, when it moves in one direction. To be profitable in the long run, the profit during sideways movements needs to offset the loss during periods of high volatility. The fact that one side is CERTAIN to go to zero makes this much harder. It is even IMPOSSIBLE to market make on prediction markets WITHOUT taking at the same time a directional bet on the outcome of the market. 2. Volatility is instant, causing losses for MMs In prediction markets, an adverse event can hit at any time that moves the price instantly to 0: 1. Market "Who will Trump meet this month?" 2. Trump announces meeting with Putin. 3. Price of YES goes instantly to $1, NO goes to 0. This is not possible in other markets. Bitcoin might dump, but it will not go to zero over night. Having limit orders in the books is therefore much more risky in prediction markets than in TradFi or crypto, because when news hit you might get filled against fast news traders. Everyone who uses prediction markets experienced this already, and it's another factor that makes market making less attractive. 3. Much more insider activity Insider trading makes the problem from above even more extreme: If you have information that is not public, you can "eat the book" (= buy the liquidity that the market maker provides) even BEFORE your insider knowledge becomes public. Like this, the market maker doesn't even have the chance to react. In crypto market making, trading firms pull the liquidity from the books during times of high volatility. This protects them against the risk of being filled one-sided during periods of high volatility and ending up holding the bag (what I mentioned in points 1 and 2). But when insiders are active, this is impossible. This means that EVERY market maker needs to incur a default level of losses that is unavoidable, coming from "smarter money" arbitraging their quotes. In market maker lingo people call this "toxic flow". And due to heavy insider activity, prediction markets are full of it. The effect is that market making on markets with a lot of "toxic flow" becomes overall less profitable. Therefore less people do it. Therefore liquidity gets worse. And that's how we end up with the situation of today, where market making is mostly being done: - by manual traders - who are fine with having directional exposure Now you know. 🙌

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