What is liquidity, and why does it matter so much in prediction markets?

Detailed Explanation

1. Liquidity shows up as:
   • Tight bid/ask spreads
   • Deep order book (lots of size near current price)
   • Consistent volume over time
2. Why it exists: Many markets are niche; fewer participants means fewer resting orders.
3. Why it matters: Your “paper edge” can vanish once you factor in spread + slippage + fees.

Common Scenarios

• You see a “mispriced” market but can’t buy enough size
• You want to exit before resolution and struggle to find bids
• You’re trading correlated markets and need tight execution
• You’re running a systematic strategy that depends on frequent rebalancing

Exceptions & Edge Cases

• If you’re willing to hold to settlement, then exit liquidity matters less (entry still matters).
• If a major news event hits, then liquidity can spike briefly—then vanish.
• If the platform has an automated market maker (AMM), then liquidity behaves differently but slippage still exists.

Practical Examples

• You think “Yes” should be $0.70 but it’s $0.60:
  • Spread is $0.55 bid / $0.65 ask (10c spread)
  • Your “edge” is 10c, but you pay 5c over mid + fees → edge compresses fast.

Actionable Takeaways

• ✅ Measure spread (cents) and depth (shares near mid)
• ✅ Size trades relative to depth (don’t be the market)
• ✅ Prefer limit orders when liquidity is thin
• ✅ Track average volume over time, not just today

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