71 cents*, the bookie gets a cut either way it goes.

Even if a cut isn't taken and there aren't other inefficiencies, any money tied up in long-term predictions is earning 0% instead of whatever the current risk-free rate of return is.

Assuming that the prediction market is perfectly priced right? How accurate is that assumption, or are you counting that as an “inefficiency”?

IBKR relentlessly advertises on the radio, so I’m aware that on their scheme you earn an interest like incentive coupon for every day you hold open the position.

Happy IBKR customer here. ForecastTrader has absolutely horrific liquidity outside of maybe 30-40 large contracts. The rest is all market makers that only offer 10-100 or so shares at each price point before bumping up a penny or two. No knock on IBKR as a whole, but you can't even effectively buy on most events or outcomes without slippage eating away your entire edge, and forget about real serious positions above a few grand entirely outside of those 30-40 big contracts.

Earning less than the risk free rate is a 'cut being taken'.

Untrue for polymarket. True for kalshi. No bookie fees on polymarket

Wow that's news to me. How does polymarket make money if not from fees?

It doesn't seem like it's strictly true that they don't charge trading fees.

From their docs, it looks like they charge fees to bet "takers" (as opposed to makers), but exclude the geopolitical and world-events markets where they don't charge fees.

I have to imagine that may be related to some of the blow-back towards prediction markets about profiting on topics like war & their potential for manipulation.

Given it sounds like the bot bets everywhere other than sports, many of those categories would likely have fees in this case.

Polymarket charges “taker” fees (people removing liquidity by matching listed orders) on most markets. Geopolitics markets are exempt. A portion of the collected fees then get redistributed to “makers” (people who provide liquidity by listing orders for others to match). Presumably the rest of these fees make up polymarket’s revenue.

Which is essentially also providing a platform for making the book for the other platform, on which 'bookie fees' are charged, but Polymarket itself only keeps a certain cut of it, for facilitating but not actually book-making.

They emit new (crypto) tokens which they can sell

trying to become bloomberg by selling to institutions

This is the truth of the matter, ultimately nobody wins except the bookie, who profits either way.

On Polymarket you can be the bookie and put up a yes at $0.72 and no at $0.74 if you’re confident in that 73% estimate.

In fact, Polymarket will subsidize you to do this:

https://docs.polymarket.com/market-makers/overview

https://docs.polymarket.com/market-makers/maker-rebates

Hedging can itself be a useful service, even if the customer doesn't make money on average. Have you heard of insurance?

Wouldn't it be 75 cents then? (The cut would come out of higher pricing, since the payout is always a dollar).

Well, 75 cents for you buying the bet, 71 cent for you selling the bet.

Or something like that.

> I bet the average price for a no bet across these markets is 73 cents.

Behavioral economics has already answered the question of whether humans are, on average, perfectly rational economic actors. They are not.

To the contrary, there is substantial evidence indicating a meaningful number of humans will mis-estimate the likelihood of uncommon future events.

Well, if the price would be incorrectly set, then bots like this one would make money, which would in sufficient time cause the market to adapt and the average price would change so the bot doesn't work.

That doesn't matter so much when it happens in a place where people can make money from other people's irrationality. Even if there are a bunch of irrational people placing bad bets on uncommon future events, rational people looking to make a buck will take the other side of that bet, until the price is sensible.

The alternative would be that there's a bunch of free money sitting there waiting for someone to decide to pick it up, and nobody is, not even you.

Actually, having a bunch of noise traders around is a great attraction for the ration people to show up.

It doesn't matter if a vast majority of people are not rational economic actors. It only takes 1 rational actor with enough capital to take the other side of all the bad bets, and the market will be priced correctly even if the other 99 people are irrational.

'Enough' [capital] is doing a lot of work in that sentence. In the limit of a one-sided irrational market, the 'rational actor' would need to take the other side of every open transaction.

Yeah, but in the limit of a one-sided irrational market, the rational actor is going to be given as much capital as he can take.

In the long run. In the short run, our rational actor will be constrained by the Kelly criterion, well and whatever outside funding she can raise.

It's not. But also a lot of those stats thrown around are misleading.

If the average no costs less than 73 cents, but the 73% of all polymarkets resolve to No, that would imply that the nothing-ever-happens strategy here is profitable. Are you claiming that it is profitable? Or are one of those premises incorrect?

Edit: conversely, if the average no costs _more_ than 73 cents, but the 73% of all polymarkets resolve to No, that would imply that an everything-always-happens strategy is profitable (neglecting slippage)

From what I've seen and tested, it's been profitable, for the reason you said. Variance and other caveats caused me to not pursue it further. https://news.ycombinator.com/item?id=47754918

> Edit: conversely, if the average no costs _more_ than 73 cents, but the 73% of all polymarkets resolve to No, that would imply that an everything-always-happens strategy is profitable (neglecting slippage)

Or just the bid-ask spread; price no at 73.25 and yes at 27.5 and you have a profitable but theoretical mid-market price.

Are you willing to pay $.27 for that perspective? Sounds like we have a market!

Why would outcomes match perceptions?

The whole premise of gambling is that they don't

The whole premise of prediction markets is that the few people whose perception do match outcomes make bets to push the money-weighted average perception toward outcomes. If perceptions still don't match outcomes at that point, average return is 0 minus transactions, with high variance.

huh? that sounds like ideology and not empirical observation.

That's just how limit order books work with mark-to-market pricing

Could you point me towards some resource that would help me understand what you wrote? Genuinely curious about how this stuff works

https://en.wikipedia.org/wiki/Efficient-market_hypothesis might be a good start.

Step 2: https://en.wikipedia.org/wiki/Grossman%E2%80%93Stiglitz_para...

Yes, but I always found that objection a bit silly. It's like pointing out that real cows are obviously not perfect spheres nor do they live in a vacuum.

> [...] if prices perfectly reflected available information, there is no profit to gathering information, in which case there would be little reason to trade and markets would eventually collapse.[2]

That's a stupid way to formulate this. Markets wouldn't "collapse". They would get slightly less efficient until equilibrium is restored to where arbitragers can make enough money to keep prices at that level of efficiency.

Maybe not "collapse" in a the sense of going to zero but if there was no profit to trading, then the quant trading industry would not exist, trading profits would collapse.

Meanwhile Two Sigma is hiring alpha quants to be AI research scientists at $250k starting salary + bonuses.

Even if we're just talking about the HFT/sell-side, there clearly exist various anomalous inefficiencies that can be exploited.

Fama's guy doesn't agree either [1]

https://www.ft.com/content/813b3d76-6ef1-427d-a2e0-76540f58a...

As I said, if we woke up this morning and prices were magically efficient in an idealised sense, at most a few quants would go home and retire early, and tomorrow we'd be back at the level (in-) efficiency that allows people to be market makers.

How can prices reflect all available information if there's no profit to collecting the information and there are no informed quant traders? Who is collecting the information exactly so that prices can reflect it? It doesn't happen magically or automatically - Traders create efficiency. It's like a kaggle contest* to process information such that prices reflect it quickly.

You don't believe in the existence of residual return orthogonal to priced cross sectional risk factors (alpha)?

E.g. Trends, momentum, volatility clustering, etc. many easily demonstrable inefficiencies. VPIN and order flow toxicity are highly predictive features. Most HFT MM especially in crypto involves hybrid alpha also

* https://www.kaggle.com/competitions/jane-street-real-time-ma...

I don't know what your question is about?

I would have hoped that by now it was obvious that we are talking about a _specific_ weak form of the EMH that takes friction into account?

What is your whole first paragraph about? Who are you trying to convince? Where's the strawman that claimed that the strongest version of EMH that you can imagine is literally true?

There's no single weak form of EMH that could be accurate or inaccurate: there are many versions of the EMH in various strengths and dimensions (that can be accurate or inaccurate).

To be more specific: Jane Street believes (or acts lie they believe) that markets are at least efficient enough that it takes a lot of effort for them to make money. As a very, very weak form: someone doing chart astrology, eh, I mean technical analysis, on S&P 500 stocks won't beat the market. But even much stronger versions than this are defensible.

The real strong forms that say that all information is preciously reflected in profits is a simplifying assumption you can sometimes make to make your life easier. Just like you sometimes neglect friction in physics. But when you want to decide how long your train needs to emergency brake, you kinda need to take friction into account. Similarly, when trying to make money in the market or trying to understand how others like Jane Street make money, the strongest EMH is not a good guide.

Question is about EMH and how you expect efficiency to be achieved absent profit for collecting the information.

There are 3 accepted forms of EMH. I'm talking about weak form - just price history and nothing else. E.g. formulaic alpha have demonstrable predictive value in modeling.

All that to say you believe trading profits are real. Maybe you just need to learn more about what a buy side alpha quant at two sigma does for a living. Trading models can be robust and exploit real inefficiencies. Weak form EMH is demonstrably false on it's face, as you agree.

> Question is about EMH and how you expect efficiency to be achieved absent profit for collecting the information.

Huh, no?

You're deliberately misunderstanding that you linked an article to EMH as informative and true, and then don't want to defend it. How do markets become efficient and reflect (any) information if nobody can profit by collecting information and trading on it? EMH states it's impossible to beat the market and that all available information is priced in. How, magically?

The way you're speaking about trading in terms of technical analysis implies you have retail trading exposure and have no idea what institutional alpha quants do.

This explainer might help you understand: https://youtu.be/RpCzaEn4rnc?t=257

That's pure ideology and not empirical. There's you know, even a large section there in that article pointing that out

The index fund industry would like to have a word with you.

Take it up with Wikipedia

But in aggregate they might.

I’ll take the “no” side of that bet ;)

A persistent bias in prediction markets is pricing very non likely events as slightly more likely than they are. ie; a 1% event priced at 4%, etc, because people like to bet long shots.

Whether there is enough of a predictable bias there to snag enough low return high probability bets to beat the vig and not shift the markets I have not looked into in any way,but it is a known bias with them.

The real money to be made in prediction markets is being the ones with the actual knowledge which is arguably why they are useful and why for some topics, people find them abhorrent.

I think you get less return on investment for the same absolute edge in percentage points. A 1% event priced at 4% gets you a 3/96 = ~3.1% return. A 53% event priced at 50% gets you a 6% return. You nearly double your returns by investing in the latter market even though they're both off by 3 percentage points.

If the market isn't resolving soon, the small return might not be worth it.

It might be a bias in terms of the probability of events, but I'm not so sure this is a market inefficiency in terms of actual trading strategy. If true odds are 1% and the event is priced at 4%, I can sell NO for a 3% edge... but lose 100% once out of a hundred. Doesn't seem worth it!