Prediction Market Arbitrage

Two venues quoting the same event at different prices looks like free money. Most of the time it is a wording difference, a fee, or a liquidity mirage — here is how to tell.

The three kinds of prediction market arbitrage

Cross-venue. The same event trades at 61% on one exchange and 55% on another. Buy the cheap side, sell the expensive side, and collect the spread at resolution — if the contracts truly match.

Internal (dutching). In a multi-outcome market, the prices of all mutually exclusive outcomes should sum to roughly 100%. When they sum to meaningfully less, buying every outcome guarantees a payout larger than the cost.

Logical. Two related contracts price an impossible pair. If 'rate cut by September' trades above 'rate cut by December', that is a contradiction, because anything that happens by September has necessarily happened by December.

Why most apparent spreads are not edges

Resolution wording is the biggest trap. Two contracts can look identical and resolve on different sources, different cutoff times, or different definitions. A spread between them is not mispricing — it is the market pricing two genuinely different questions.

Fees and the full round trip. Taker fees on both legs, withdrawal costs, and any on-chain transaction cost all subtract from a gross spread. A six-point gap can be a one-point edge after costs.

Capital lockup. Arbitrage in event contracts usually requires holding both legs to resolution. Capital tied up for eight months to capture three points is a modest annualised return, and it is unavailable for anything else in the meantime.

Depth. The quoted price exists at a quoted size. If the cheap side only has a few hundred dollars of depth, the trade does not scale, and attempting to scale it moves the price against you.

Speed and the shrinking window

Genuine cross-venue discrepancies tend to be short-lived. Published analyses of prediction market spreads have found that identifiable gaps often close within minutes rather than hours, because dedicated participants are watching for exactly this.

The practical implication is that discretionary, manual cross-venue arbitrage is difficult to run profitably. What remains useful for most people is the signal: a persistent divergence usually means the two venues disagree about something real, and that disagreement is worth understanding even if you never trade it.

A checklist before treating a gap as an opportunity

Confirm both contracts resolve on the same source, with the same deadline, under the same definition. Check depth on both legs at the size you intend. Cost the complete round trip, including fees on entry and exit. Calculate the annualised return given the time to resolution, not the raw spread. Then ask what the other side knows that you do not.