Market Making in Prediction Markets
Users do not return because a prediction product looks good. They return when they can execute quickly at fair prices. That is a liquidity problem, and market making is the operational answer.
What market making does
Market makers provide continuous two-sided quotes so traders can buy and sell without waiting for a matching counterparty. This reduces friction and stabilizes the user experience.
Why spread alone is not enough
Tight spreads can still fail if quote depth is shallow or if prices collapse under event volatility. Real quality combines spread, depth, and quote durability.
Designing maker incentives
Incentives should reward sustained quote quality, not short bursts of activity. Otherwise, makers optimize for rewards and leave when volatility rises.
Risk controls for makers
Operationally, teams need inventory limits, volatility bands, and emergency quote widening rules. These controls protect both the platform and liquidity providers during stress windows.
How to measure performance
Track time-in-spread, median executable size, slippage at target order size, and post-event recovery speed after major news shocks.
Business implication
If market making quality is weak, acquisition spend is wasted because users churn after first execution failures.