Market

#Definition

A Market is the trading infrastructure that enables participants to express their beliefs about future outcomes through buying and selling. In prediction markets specifically, a market is created around a specific question or event, allowing traders to stake money on different possible outcomes.

#Market Structure

#Core Components

Every market has:

1. Question/Proposition: What is being forecasted

   • "Will it rain tomorrow in NYC?"
   • "Who wins the 2024 election?"

2. Outcomes: Possible results

   • Binary: YES/NO
   • Categorical: Trump/Biden/Other
   • Scalar: Final score, price level

3. Trading Mechanism: How trades execute

   • Order book (centralized limit orders)
   • AMM (automated market maker)
   • Parimutuel (pool betting)

4. Price: Current market price (implied probability)

   • 65¢ on YES = 65% probability

5. Liquidity: Available capital for trading

   • Order book depth
   • AMM pool size

#Market Lifecycle

Created → Open → Trading Active → Closed → Resolved → Settled
   ↓         ↓          ↓            ↓         ↓          ↓
 Rules    Orders    Volume       Stop      Oracle    Payouts
  set    placed    builds     trading   determines distributed
                                        outcome

#Market Types by Outcome Structure

#Binary Markets

• Two possible outcomes: YES/NO
• Most common type
• Simple, liquid, easy to understand
• Example: "Will Trump win the election?"

#Categorical Markets

• Multiple mutually exclusive outcomes
• Winner-takes-all resolution
• Example: "Who wins Best Picture?" (10 nominees)

#Scalar Markets

• Outcome is a number within a range
• Market resolves to position on scale
• Example: "What will be the final vote percentage?" (0-100%)

#Conditional Markets

• Outcome depends on another event
• "If X happens, will Y happen?"
• Example: "If Biden wins, will unemployment be <4%?"

#Market Types by Mechanism

#Order Book Markets

How it works:

• Users post limit orders (buy/sell at specific prices)
• Orders match when bid meets ask
• Continuous double auction

Platforms: Kalshi, traditional exchanges

Pros:

• Price discovery through competition
• Control over execution price
• Deep liquidity when popular

Cons:

• Requires market makers for liquidity
• Can have wide spreads on niche markets
• More complex for beginners

#AMM Markets

How it works:

• Liquidity pool provides continuous pricing
• Constant function determines price (e.g., x*y=k)
• Trade directly against pool, no counterparty matching

Platforms: Polymarket (CLOB + AMM), Omen

Pros:

• Always available liquidity
• Simple for users (market orders only)
• Works for long-tail markets

Cons:

• Slippage on large trades
• Less efficient price discovery
• Impermanent loss for liquidity providers

#Parimutuel Markets

How it works:

• All stakes go into pools
• Winners split the pool proportionally
• No intermediary price, just pool ratios

Platforms: Some horse racing, Augur v1

Pros:

• No counterparty risk
• Simple to understand
• No spread/fees until resolution

Cons:

• No continuous pricing
• Can't exit before resolution
• Final odds unknown until close

#Market Quality Indicators

#High-Quality Markets

✅ Clear resolution criteria ✅ Deep liquidity ($10k+ volume) ✅ Tight spreads (<2% bid-ask) ✅ Diverse trader base (not dominated by one large player) ✅ Active trading (frequent price updates) ✅ Reputable creator/platform

#Low-Quality Markets

❌ Ambiguous rules ❌ Low volume (<$100) ❌ Wide spreads (>10%) ❌ Single large trader dominance ❌ Stale prices (no updates for hours/days) ❌ Questionable resolution source

#Market Creation

#Platform-Created Markets (Kalshi)

• Curated: Platform staff design markets
• Standardized: Follow templates and regulations
• Quality controlled: Legal and compliance review
• Limited selection: Only pre-approved events

#User-Created Markets (Polymarket, Manifold)

• Permissionless: Anyone can create (with stake)
• Flexible: Any question, any rules
• Variable quality: Some excellent, some poor
• Incentivized: Creators earn fees or reputation

Requirements for creation:

• Stake/bond (ensures honest resolution)
• Clear question and rules
• Specified resolution source
• Close and resolution dates
• Minimum liquidity commitment

#Market Participants

#Traders

• Buy and sell based on beliefs
• Seek profit from mispricing
• Provide information through trades

#Market Makers

• Provide liquidity on both sides
• Earn spread between bid/ask
• Take on inventory risk

#Arbitrageurs

• Exploit price differences across markets
• Keep correlated markets aligned
• Improve efficiency

#Informed Traders

• Have special knowledge/analysis
• Move prices toward truth
• Earn returns on information edge

#Noise Traders

• Trade without information edge
• May follow trends or intuition
• Provide liquidity (at their expense)

#Market Dynamics

#Price Discovery

Markets aggregate information through trading:

1. Informed trader sees new information
2. Trades based on that information
3. Price moves to reflect new information
4. Other traders observe price change
5. Information spreads through market mechanism

#Efficient Markets

Well-functioning markets should:

• Quickly incorporate new information into prices
• Reflect aggregate wisdom of all participants
• Provide accurate probability estimates
• Self-correct when mispriced

#Market Failures

Markets can fail when:

• Manipulation: Large trader moves price artificially
• Thin liquidity: Few traders, easy to manipulate
• Information asymmetry: Insiders dominate
• Irrational participation: "Dumb money" dominates
• Platform risk: Technical issues, insolvency

#Market Fees

Common fee structures:

#Cross-Market Relationships

Markets often interact:

Correlated markets: "Trump wins" and "Republican Senate" should move together

Conditional markets: "Biden wins" market affects "If Biden wins, will..." markets

Summing to 100%: Categorical markets (all outcomes must sum to 100%)

Arbitrage opportunities: When correlated markets diverge, traders profit by aligning them

#Market Manipulation

Markets can be manipulated through:

• Wash trading: Trading with yourself to fake volume
• Spoofing: Placing fake orders to mislead
• Pump and dump: Artificially inflate then sell
• Coordinated trading: Collusion to move price

Platforms combat this with:

• Position limits
• Wash trading detection
• KYC (Know Your Customer) requirements
• Surveillance and bans

#Market Research

Before trading, analyze:

1. Volume history: Has the market traded actively?
2. Price history: How has probability changed?
3. Liquidity: Can you enter/exit at good prices?
4. Rules review: Are resolution criteria clear?
5. Competing markets: Are there similar markets with better prices?
6. Creator reputation: Do they resolve fairly?

#The Future of Markets

Emerging trends:

• Micro-markets: Very specific, granular questions
• Conditional chains: Markets dependent on multiple conditions
• Perpetual markets: No expiry, rolling questions
• Synthetic markets: Derivative markets on market prices
• DAO governance: Community-governed market creation and resolution