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The microstructure of wealth transfer in prediction markets

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Re: The microstructure of wealth transfer in prediction markets

#51

Post by jvanderbot »

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…

That's the actual point. Everyone else is there to make money gambling, but the whole premise is to incentivize people with secret information to share it anonymously with the public, and take a reward for doing it.

All without traceability or secret drops or whatever.

POSIWID

Re: The microstructure of wealth transfer in prediction markets

#52

Post by dragonwriter »

JumpCrisscross wrote: post #39
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 gives very powerful people a vehicle to make lobsided bets on outcomes they control I'm sceptical that prediction markets uniquely enable this. Like, if you want to bet on U.S. airstrikes in the short term, you could always buy oil options (or short exposed companies). If you're in for the long term, you're buying something that benefits from cheaper gas, e.g. an additives company.

All of these things are much more subject to the problem that effects policy generally: the law of unintended consequences. Betting on the policy, rather than an intended/expected longer-term outcome that is easily derailed by intervening events outside of your direct control is much more direct (plus, if you are corrupt enough to bet on policy you control, that policy is probably already seeking a longer-term aim that serves your existing financial interests, so the ability to bet on the policy itself makes the corruption more attractive by providing a more immediate and certain payoff on top of the longer-term, less certain one.)

Re: The microstructure of wealth transfer in prediction markets

#53

Post by jonbecker »

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.

Re: The microstructure of wealth transfer in prediction markets

#54

Post by Majromax »

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 ignores the time value of money, and contracts take time to resolve. If a contract won't resolve for six months and the risk-free rate is 5%, then buying a "sure thing" over 97.5¢ is a loss net of otherwise earnable interest.

3. Long shots offer greater implied leverage to bettors, making them more attractive. This is still (sometimes) an exploitable mispricing, but it's closer to the well-understood "bet against beta" factor.

(Edit to add) Also, I think their explanation of the non-returns on finance is lacking:

> Why is Finance efficient? The likely explanation is participant selection; financial questions attract traders who think in probabilities and expected values rather than fans betting on their favorite team or partisans betting on a preferred candidate. The questions themselves are dry ("Will the S&P close above 6000?"), which filters out emotional bettors.

Financial contracts are the ones that are most perfectly hedges with existing markets. "Will the S&P close above X?" is a binary option, after all, so it's comparatively easy for a market-maker to almost perfectly offset their Kalshi positions with opposite positions in traditional markets.

Re: The microstructure of wealth transfer in prediction markets

#55

Post by terminalshort »

JumpCrisscross wrote: post #29
yieldcrv wrote: post #26

To me this is all the more reason to get regulatory gatekeeping out of the financial markets If the odds in some financial products are worse than gambling while everyone can access gambling, then people should stop making a distinction under the guise of protecting investors it just drives investors to actual gambling because they cant get the exposure they were already looking for

> it just drives investors to actual gambling because they cant get the exposure they were already looking for This argument gets trotted out by Wall Street every decade or so, usually under the guise of "democratising" some piece of finance. It's almost always bunk. Most investment capital is looking for safe returns. It's not competing with gambling. Even within the high-risk end of finance, the game is in turning…

The same financial products are used in both gambling and smart investing. The canonical example here being options. And the restrictions on what the public can and cannot invest in are complete bullshit. You can't buy shares in a series A startup because that is deemed to be too risky for anyone who is not an "accredited" investor ("accredited" here literally means rich). But anyone who wants to can bet on sports, go to a casino, or buy a 2x levered VIX ETF.

Re: The microstructure of wealth transfer in prediction markets

#56

Post by postflopclarity »

denotational wrote: post #35
postflopclarity wrote: post #8

Earlier quoted context omitted.

> Why is Kalshi structured with these yes vs. no options for all outcomes? it's basically how they do margin. otherwise you wouldn't be able to sell / post asks without already having a long position. for kalshi, it's actually one single security in the background they just present it as two order books (but really it's one). for polymarket, they are two distinct products that trade separately, and technically could…

It’s not really margin since there’s no leverage: the potential loss associated with the bet has to be deposited, so it’s fully collateralised.

right, I guess I should have said it's what they have _instead_ of letting users trade on margin.

Re: The microstructure of wealth transfer in prediction markets

#57

Post by postflopclarity »

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

Re: The microstructure of wealth transfer in prediction markets

#58

Post by jlawson »

JumpCrisscross wrote: post #39
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 gives very powerful people a vehicle to make lobsided bets on outcomes they control I'm sceptical that prediction markets uniquely enable this. Like, if you want to bet on U.S. airstrikes in the short term, you could always buy oil options (or short exposed companies). If you're in for the long term, you're buying something that benefits from cheaper gas, e.g. an additives company.

Prediction markets don't uniquely enable it, but they make it far more effective and easy.

Insider trading is illegal. And for trades that aren't technically insider trading, often having some information ahead of time isn't as useful as it seems. Markets are known to react unpredictably to news; sometimes they move the opposite way from what you'd think, especially over the mid-long term, and there are many other influences on the price.

With a prediction market though, if you know what'll happen in the world, you know exactly what you'll win in the market.

Re: The microstructure of wealth transfer in prediction markets

#59

Post by ncr100 »

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…

This is fascinating.

Re: The microstructure of wealth transfer in prediction markets

#60

Post by ncr100 »

jvanderbot wrote: post #51
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…

That's the actual point. Everyone else is there to make money gambling, but the whole premise is to incentivize people with secret information to share it anonymously with the public, and take a reward for doing it. All without traceability or secret drops or whatever. POSIWID

(The Purpose Of a System Is What It Does)
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