How do fees and platform rules affect prediction market prices?

Detailed Explanation

Prediction market prices are not frictionless probabilities. Fees increase the cost of trading and reduce expected returns, which discourages frequent rebalancing and arbitrage. Platform rules such as position limits, collateral requirements, and settlement timing further constrain participation. These frictions are especially impactful in thin markets, where small costs can outweigh small edges. As a result, prices may remain slightly misaligned with “true” probabilities for extended periods, particularly in markets with low volume or long horizons.

Common Scenarios

• Thin political or policy markets
• Long-dated contracts
• Small expected-value trades
• Arbitrage-style strategies

Exceptions & Edge Cases

• If liquidity is very high, then fees matter less.
• If traders hold to settlement, then exit costs matter less.
• If platforms subsidize liquidity, then prices may improve.

Practical Examples

• A 3% fee eliminates a 2% theoretical edge.
• Traders avoid correcting a small mispricing.

Actionable Takeaways

• ✅ Always net prices of fees
• ✅ Avoid marginal EV trades
• ✅ Prefer markets where costs are small relative to edge
• ✅ Understand platform-specific rules

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