#Definition
An arbitrageur is a trader who profits by exploiting price discrepancies between related markets or instruments, capturing risk-free or low-risk returns by simultaneously buying and selling equivalent positions. In prediction markets, arbitrageurs enforce pricing consistency—ensuring that Yes and No shares sum to $1.00, that identical events price similarly across platforms, and that related outcomes maintain logical relationships.
These traders serve as the enforcement mechanism for market efficiency, correcting mispricings that would otherwise persist.
#Why It Matters in Prediction Markets
Arbitrageurs perform a critical function: they keep prediction market prices accurate and internally consistent. Without them, prices could drift from fair value, reducing the forecasting utility that makes these markets valuable.
Scale of arbitrage activity: From April 2024 to April 2025, arbitrageurs extracted over **4.2 million combined, demonstrating both the opportunity and concentration in this activity.
Their activities benefit all market participants:
- Prices remain anchored to rational probability estimates
- Cross-platform discrepancies close quickly
- Logical inconsistencies (like related outcomes implying impossible probabilities) get corrected
- Liquidity improves as arbitrageurs add trading volume
For the prediction market ecosystem, arbitrageurs are essential infrastructure. For individual traders, understanding arbitrage dynamics reveals opportunities and explains price behavior.
#How It Works
Arbitrageurs identify and exploit several types of price discrepancies:
#Cross-Platform Arbitrage
When the same event trades at different prices on different platforms:
- Identify a binary event trading at 0.48 on another platform
- Buy Yes shares at $0.48 on the cheaper platform
- Sell Yes shares (or buy No shares) at $0.55 on the expensive platform
- Lock in $0.07 profit per share regardless of outcome
Numerical example:
- Platform A: Yes shares at $0.48
- Platform B: Yes shares at $0.55
- Position: Buy 1000 shares on A (550)
- If Yes wins: Receive 1000 to B. Net: $70 profit
- If No wins: Receive 0 to B. Net: $70 profit (from initial price difference)
#Internal Consistency Arbitrage
Prediction markets require Yes + No = $1.00 for binary markets. When this relationship breaks:
- If Yes trades at 0.45 (sum = $1.03)
- Sell both Yes and No shares
- Collect 1.00 at resolution
- Profit: $0.03 per share pair
#Related Outcome Arbitrage
When multiple markets cover related events:
- "Candidate X wins primary" trades at $0.70
- "Candidate X wins general election" trades at $0.60
- Logically, general election probability cannot exceed primary probability
- If mispriced, sell the overpriced outcome and buy the underpriced one
#Examples
Cross-exchange price gap: An arbitrageur notices a cryptocurrency regulation market pricing Yes at 0.57 on another. They buy on the cheaper platform and hedge on the expensive one, capturing a $0.05 spread regardless of the regulatory outcome.
Fee-adjusted arbitrage: Two platforms show apparently identical prices, but one charges 2% fees while another charges 5%. The arbitrageur calculates true costs and exploits the effective price difference after fees, accepting smaller but reliable profits.
Categorical market arbitrage: A categorical market on "Which party wins the election" shows probabilities summing to 1.08 across all candidates. The arbitrageur sells shares in every outcome, locking in an 8% return minus fees.
Time-zone arbitrage: News breaks during Asian trading hours. One platform's prices adjust immediately while another, with primarily US-based liquidity, lags. The arbitrageur trades on the slow platform against the fast platform's informed prices.
#Risks and Common Mistakes
Execution risk: Arbitrage requires simultaneous execution across platforms. If one leg fills but the other doesn't (or fills at a worse price), the "risk-free" trade becomes a directional bet.
Fee underestimation: Platform fees, withdrawal costs, and gas fees (for blockchain-based markets) can eliminate apparent arbitrage profits. A 0.04.
Settlement risk: Different platforms may resolve identical events differently due to varying resolution sources or rule interpretations. What seems like the same market may not be economically equivalent.
Capital lockup: Arbitrage ties up capital on multiple platforms simultaneously. During the position's duration, that capital cannot be deployed elsewhere. Opportunity cost matters.
Counterparty risk: Funds held on multiple platforms face multiple points of failure. Platform insolvency, regulatory action, or technical problems can trap capital mid-arbitrage.
Timing mismatch: Markets with different settlement dates create exposure even if the underlying event is identical. Early settlement on one platform while the other remains open creates directional risk.
#Practical Tips for Traders
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Calculate total round-trip costs including all fees, spreads, and withdrawal costs before executing any arbitrage
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Pre-fund accounts on multiple platforms to enable rapid execution when opportunities appear
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Use automation where possible—manual arbitrage execution is often too slow to capture fleeting opportunities
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Verify resolution source alignment before assuming two markets are equivalent; subtle differences in resolution criteria can cause divergent outcomes
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Start with larger, more liquid spreads that can absorb execution slippage rather than chasing tiny discrepancies
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Account for capital lockup duration when calculating returns; a 2% return over 6 months is less attractive than 1% over a week
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Monitor platform-specific risks including regulatory status, withdrawal reliability, and historical resolution disputes
#Related Terms
#FAQ
#What is the difference between an arbitrageur and a regular trader?
Regular traders take directional positions based on beliefs about outcomes—they profit if their prediction is correct and lose if wrong. Arbitrageurs profit from price discrepancies regardless of outcome, capturing spreads between mispriced instruments. Their returns come from market inefficiency rather than forecasting skill.
#Is arbitrage truly risk-free in prediction markets?
Theoretical arbitrage is risk-free, but practical arbitrage carries execution risk, fee risk, settlement risk, and counterparty risk. True risk-free opportunities are rare and short-lived because other arbitrageurs compete to capture them. Most "arbitrage" in prediction markets involves some residual risk.
#How much capital do arbitrageurs need?
Arbitrage profits are typically small percentages, so meaningful returns require significant capital. A 10,000 position yields $200—worthwhile for a professional but marginal for a small trader after fees. Most active arbitrageurs operate with five to six figures of deployed capital across platforms.
#Do arbitrageurs help or hurt prediction market accuracy?
Arbitrageurs improve prediction market accuracy by correcting mispricings and enforcing logical consistency. They don't contribute original information about event probabilities, but they ensure that existing information is properly reflected in prices across all related markets. This makes prediction markets more reliable as forecasting tools.
#Can beginners profit from arbitrage?
Arbitrage is challenging for beginners because opportunities are competitive, fees eat into thin margins, and execution requires speed and precision. Beginners often underestimate costs or misidentify apparent opportunities that aren't genuine arbitrage. Starting with larger, slower-moving spreads and carefully tracking all costs is advisable before scaling up.