The microstructure of wealth transfer in prediction markets • Hacker News Board

Re: The microstructure of wealth transfer in prediction markets

#61

Post by jpmattia » Mon, Jan 19, 2026, 6:42 PM UTC

jonbecker wrote: post #53

jpmattia wrote: post #48

Something that appears to be missing: Certain events attract "advertising" types of bets. E.g. There is value in making a candidate appear to be a leader, so dedicating dollars to swinging the market is more of a form of advertising than an intelligent bet. So it would be interesting to measure the inefficiencies of various bets vs the total market value in that bet. e: Although full disclosure, I did not pick apart…

super interesting, re: spending money to move the line is just another form of non-profit-seeking "consumption." i didn't filter for manipulation specifically, but i did find that politics was actually one of the most efficient categories (only ~1% maker/taker gap), suggesting the market absorbs those flows pretty well.

> but i did find that politics was actually one of the most efficient categories (only ~1% maker/taker gap)

I confess I'm surprised by that result in particular. I realize your results are for Kalshi, but ISTR some reports from the presidential elections on Polymarket.

But more generally: When you say there is "only a ~1% maker/taker gap", is that weighted by the size of the bets? or is it averaged over the number of bets placed?

In any case: Thanks for a very interesting paper!

Re: The microstructure of wealth transfer in prediction markets

#62

Post by shagie » Mon, Jan 19, 2026, 6:43 PM UTC

bs7280 wrote: post #33

I mentioned this on a different post - the biggest problem with prediction markets is not the gambling or dumb people losing money. Its the fact that it gives very powerful people a vehicle to make lobsided bets on outcomes they control. A small example of this would be NFL / NBA Refs fixing playoff games with a bad call or two. This actually happened 20 years ago, an NBA ref went to prison over being bribed just $20…

> How many times Pam Bondi says the word "China" in a press conference.

A classic example is the color of the Queen's hat at Royal Ascot.

https://www.upi.com/Odd_News/2008/06/20/Bets-placed-on-queen...

https://news.williamhill.com/horse-racing/queens-hat-betting...

And the relevant one from 2005 - https://www.foxnews.com/story/hat-trick-upsets-british-booki...

> But alarms were raised Thursday morning, hours before the royal appearance, when a run of bets for brown started coming in, displacing light blue as the favorite.

> "Nobody was backing brown at all and suddenly everyone wanted in on it," Paddy Power (search), owner of the eponymous chain of betting shops that inaugurated the hat bet 10 years ago, told The Times.

> Power's odds on brown went from 12-1, to 2-1, to even and finally to 8-11 before he yanked the bet at 11:30 a.m., 2½ hours before the Queen was due to show.

> "Someone must have been in the know. We laid 50 pounds at 20-1 and 200 pounds at 10-1 and some smaller bets," David Hood, spokesman for rival betting chain William Hill (search), told the Daily Telegraph.

> ...

> When Elizabeth II finally made her appearance, she was indeed wearing a brown hat with cream trim.

> "Somebody has made a tidy sum," sniffed Hood.

> Both he and Power, who estimated his firm lost about 10,000 pounds, or $18,000, suspected palace insiders.

Re: The microstructure of wealth transfer in prediction markets

#63

Post by ironbound » Mon, Jan 19, 2026, 6:45 PM UTC

Buttons840 wrote: post #38

bs7280 wrote: post #33

I mentioned this on a different post - the biggest problem with prediction markets is not the gambling or dumb people losing money. Its the fact that it gives very powerful people a vehicle to make lobsided bets on outcomes they control. A small example of this would be NFL / NBA Refs fixing playoff games with a bad call or two. This actually happened 20 years ago, an NBA ref went to prison over being bribed just $20…

It's a national security issue too. Somebody poor grunt who chose to earn a living by laboring (which has proven to be much less effective than being born with money) will be putting fuel in the bombers and thinking "I could just make an anonymous bet..." It's a national security issue. We saw this with the Venezuela attack. A flurry of trading and someone made $400,000 for placing a bet mere hours before the "surpri…

Pizza orders are also an indicator https://en.wikipedia.org/wiki/Pentagon_pizza_theory

Re: The microstructure of wealth transfer in prediction markets

#64

Post by shagie » Mon, Jan 19, 2026, 6:45 PM UTC

qznc wrote: post #50

bs7280 wrote: post #33

I mentioned this on a different post - the biggest problem with prediction markets is not the gambling or dumb people losing money. Its the fact that it gives very powerful people a vehicle to make lobsided bets on outcomes they control. A small example of this would be NFL / NBA Refs fixing playoff games with a bad call or two. This actually happened 20 years ago, an NBA ref went to prison over being bribed just $20…

Why isn’t political gambling in the UK a problem then?

It is. https://en.wikipedia.org/wiki/2024_United_Kingdom_general_el...

> During the 2024 general election campaign, allegations were made that illicit bets were placed by political party members and police officers, some of whom may have had insider knowledge of the date of the general election before Rishi Sunak, the Prime Minister at the time, publicly announced when it would be held.

> ...

> In April 2025, the Gambling Commission charged 15 people with offences under Section 42 of the Gambling Act 2005, including Russell George, Tony Lee, Nick Mason, Laura Saunders, and Craig Williams. Trials are not expected to begin until September 2027 or January 2028.

Re: The microstructure of wealth transfer in prediction markets

#65

Post by Majromax » Mon, Jan 19, 2026, 6:46 PM UTC

postflopclarity wrote: post #57

Majromax wrote: post #54

The analysis is interesting, but I think it ignores a few factors: 1. The article mentions the bid/ask spread for contracts, but I believe that Kalshi also has its own fee structure. Small edges (an expected loss of 0.57¢ on a 1¢ contract implies an expected gain of 0.43¢ on a 99¢ contract, or a 5.75ppt edge) can be easily eaten by even small fees, and liquidity provision is all about small edges. 2. The article igno…

on point 1, an important thing to know is that these markets have a non-linear fee structure where the rate is higher near 0.5 and lower near tail prices

True, but from the pdf it seems like the fee charged of market makers is 1.75¢ × P × (1-P) per contract. Near P=0 that's approximately 1.75% of the notional amount invested, but near P=1 that's approximately 1.75% of the potential gain.

As I read it, the implication is that a market maker in the high-P regime needs to still have an expected edge of 1.75% to profit net of fees, which means that the 'maker return' table in this article is net negative after fees for all categories save for entertainment, media, and world events.

Re: The microstructure of wealth transfer in prediction markets

#66

Post by TeMPOraL » Mon, Jan 19, 2026, 6:54 PM UTC

bs7280 wrote: post #33

I mentioned this on a different post - the biggest problem with prediction markets is not the gambling or dumb people losing money. Its the fact that it gives very powerful people a vehicle to make lobsided bets on outcomes they control. A small example of this would be NFL / NBA Refs fixing playoff games with a bad call or two. This actually happened 20 years ago, an NBA ref went to prison over being bribed just $20…

Plenty of more fun dynamics. For example, in some cases it becomes a way for voting for decisions one otherwise wouldn't control. If a person in position to make a decision doesn't really care about any choice in particular, seeing the prediction market lean one way would incentivize them to choose the opposite, making a short sale immediately before.

It also makes sense for the people voting: by betting against the outcome they want, they end up either a) paying for getting things their way, or b) getting consolation payoff if the decision makers pick the undesired choice.

Re: The microstructure of wealth transfer in prediction markets

#67

Post by jonbecker » Mon, Jan 19, 2026, 6:54 PM UTC

jpmattia wrote: post #61

jonbecker wrote: post #53

Earlier quoted context omitted.

super interesting, re: spending money to move the line is just another form of non-profit-seeking "consumption." i didn't filter for manipulation specifically, but i did find that politics was actually one of the most efficient categories (only ~1% maker/taker gap), suggesting the market absorbs those flows pretty well.

> but i did find that politics was actually one of the most efficient categories (only ~1% maker/taker gap) I confess I'm surprised by that result in particular. I realize your results are for Kalshi, but ISTR some reports from the presidential elections on Polymarket. But more generally: When you say there is "only a ~1% maker/taker gap", is that weighted by the size of the bets? or is it averaged over the number of…

If we weight by contracts purchased the gap is 1.02%, dollar weighted the gap is 1.00%.

I'm glad you enjoyed the paper :)

Re: The microstructure of wealth transfer in prediction markets

#68

Post by kibwen » Mon, Jan 19, 2026, 6:55 PM UTC

Retric wrote: post #23

kibwen wrote: post #19

Earlier quoted context omitted.

> In prediction markets if the markets are fully efficiently priced, in the absence of transaction costs you WILL get 100% back in the long run. This is basically equivalent to the observation that, in a perfectly efficient market, no entity can ever make a profit. And yet, in the real world, entities make profits all the time. In fact, they make wild, unimaginable, world-changing, history-altering profits. This is a…

You misunderstood a basic principle here. In a perfectly efficient market all entries can make the same profit on a given investment at the same level of risk and time horizon. There’s nothing inefficient about a market having a risk premium etc.

If you're making nonzero profit that means that it's feasible for anyone else (literally anyone else, assuming zero barriers to entry, which we do assume for an efficient market) to make slightly less profit by selling the same product at a lower price, which iteratively pushes all profits towards zero. An efficient market also assumes perfect information, which includes information of future events, so talking about risk/uncertainty is already out of the question. If that sounds absurd, then yes, that's the point: our assumptions about what it takes in order to achieve an efficient market approaches the absurd. Which isn't to say that markets aren't often useful, especially compared to the alternatives, but rather that appeals to rationality don't survive contact with the enemy.

Re: The microstructure of wealth transfer in prediction markets

#69

Post by TZubiri » Mon, Jan 19, 2026, 7:04 PM UTC

bs7280 wrote: post #33

I mentioned this on a different post - the biggest problem with prediction markets is not the gambling or dumb people losing money. Its the fact that it gives very powerful people a vehicle to make lobsided bets on outcomes they control. A small example of this would be NFL / NBA Refs fixing playoff games with a bad call or two. This actually happened 20 years ago, an NBA ref went to prison over being bribed just $20…

I think the war ones are the only real concern.

In the context of legislating prediction markets or not, sports is not a concern at all.

Whether it's a net positive or negative for important shit like war and corruption, we'll see, but if it helps in the important stuff, but damages sports, sorry bud.

Re: The microstructure of wealth transfer in prediction markets

#70

Post by Retric » Mon, Jan 19, 2026, 7:04 PM UTC

kibwen wrote: post #68

Retric wrote: post #23

Earlier quoted context omitted.

You misunderstood a basic principle here. In a perfectly efficient market all entries can make the same profit on a given investment at the same level of risk and time horizon. There’s nothing inefficient about a market having a risk premium etc.

If you're making nonzero profit that means that it's feasible for anyone else (literally anyone else, assuming zero barriers to entry, which we do assume for an efficient market) to make slightly less profit by selling the same product at a lower price, which iteratively pushes all profits towards zero. An efficient market also assumes perfect information, which includes information of future events, so talking about…

The economy is finite. You can’t infinity add new participants with infinite product to sell.

Instead in an efficient market everyone is already occupied making X ROI and gives as much up by entering a new market as they gain.

Put another way, if you already own a sock with 10% ROI, you can sell it and buy a sock with 10% ROI but the transaction is pointless so it doesn’t occur.

> An efficient market also assumes perfect information, which includes information of future events, so talking about risk/uncertainty is already out of the question.

Perfect information means something different here. In Chess both players have perfect information of the game state, they don’t know the future. Poker has randomness and imperfect information but there’s other games with randomness and perfect information.