The dispersion of trading capital across multiple independent order books when a single question is split into many binary contracts. In prediction markets, this creates ghost markets where tail outcomes receive little or no volume, reducing the information captured by the market structure.
Cluster: Liquidity & Trading
The dispersion of trading capital across multiple independent order books when a single question is split into many binary contracts. In prediction markets, this creates ghost markets where tail outcomes receive little or no volume, reducing the information captured by the market structure.
Referenced in 3 articles
Follow-up to functionSPACE's V1 discretisation analysis, splitting Polymarket's 18,863 multi-market events into continuous (price brackets, weather ranges, margin percentages) versus categorical (teams, candidates) and re-running the pathology tests. Both types concentrate 90% of volume in the top 5-6 markets, but ghost markets turn out to be largely a categorical phenomenon: continuous events distribute volume more evenly across buckets and survive the liquidity cliff longer at high N. With continuous events overtaking categorical by event count in 2026Q1, the case for a continuous-distribution primitive applies to a growing share of the platform.
Survey of recent research on why conventional market making fails in prediction markets. Covers cross-venue fragmentation (the same contract at 58-67 cents on different platforms), the January 2026 Polymarket XRP exploit that paid $231K on thin weekend liquidity, Kalshi's structural longshot bias, and evidence from 150M Polymarket trades that the top 5% skilled traders earned $228M while spread capture barely moves P&L. Concludes passive LPs on these venues behave more like underwriters of terminal risk than classical market makers.
Analyzes 36,777 Polymarket events to understand what happens when continuous questions are split into dozens of independent binary contracts. Volume follows an extreme Pareto distribution: the top 3 markets capture over 75% of trading activity regardless of event size, leaving a large fraction as untradeable ghost markets. The $0.01 tick size compounds the problem, creating a rounding tax that makes low-probability contracts structurally imprecise.