The threshold level of trading volume a prediction market needs to attract informed traders who can correct mispricing, calculated as Cost of Expertise divided by Price Gap. Beyond this threshold, additional liquidity does not improve forecast accuracy.
Cluster: Liquidity & Trading
The threshold level of trading volume a prediction market needs to attract informed traders who can correct mispricing, calculated as Cost of Expertise divided by Price Gap. Beyond this threshold, additional liquidity does not improve forecast accuracy.
Referenced in 2 articles
Argues that prediction market TAM should include the supply side: as the cost of producing real-time probability estimates collapses, the addressable market extends beyond trading volume to every decision that benefits from better forecasts. Presents an ordered liquidity formation path from entertainment to information to institutional demand, and contends that scaling to $1T requires massive breadth in long-tail markets rather than concentrated depth in a few high-volume categories.
Analysis of 149 CPI prediction markets on Kalshi from 2021 to 2026 finds that trading volume explains less than 1% of variance in forecast accuracy, challenging the assumption that more liquidity improves market quality. Introduces Minimum Viable Liquidity (Cost of Expertise divided by Price Gap) as a framework for determining the threshold of liquidity needed to attract informed traders. Argues platforms should prioritize breadth over depth, running many thin markets rather than concentrating volume in few contracts.