Market Maker

Market makers play a vital role in prediction markets by standing ready to buy or sell contracts at quoted prices, earning the bid-ask spread as compensation for the service and the inventory risk they assume. Without market makers, many prediction market questions — especially less popular ones — would have no liquidity at all.

On platforms like Polymarket (which uses a CLOB — central limit order book), sophisticated algorithmic market makers deploy capital across hundreds of markets simultaneously, adjusting their quotes dynamically based on their probability estimates and risk exposure. On automated market maker (AMM) platforms, liquidity is pooled in smart contracts that use mathematical formulas to price trades.

The presence of informed market makers generally improves price discovery by incorporating new information quickly. However, there is an inherent tension: retail traders with private information can earn profits at the expense of market makers, which is why professional market makers continuously monitor news and data sources to stay calibrated.