LIQUIDITY, SPREADS & MARKET QUALITY
Plain English
Not all prediction market contracts are equally tradeable. Popular events (major Fed meetings, elections) have tight spreads and deep order books. Niche events have wide spreads that eat into your returns. Always check liquidity before sizing a position — a 5-cent spread on a $1.00 contract is a 5% immediate haircut.
Going deeper
Liquidity in prediction markets is driven by: (1) Event prominence — Fed meetings and major elections are highly liquid. (2) Time to resolution — contracts resolving sooner tend to be more liquid. (3) Media coverage — widely discussed events attract more participants. (4) Market maker activity — Kalshi's licensed market makers provide continuous liquidity in active contracts. Spread analysis: A 2-cent spread on a $0.50 contract means you need a 4% move in probability just to break even. A 10-cent spread requires a 20% move. Effective bid-ask spread directly reduces your expected return. Open Interest tells you how many contracts are outstanding — high OI with high volume means a healthy, active market. Always prefer contracts with volume > 1,000 and spreads under 5 cents for your first trades.
Examples
Liquidity Tiers on Kalshi
Tier 1 (most liquid): Fed rate decision contracts, S&P 500 year-end range, presidential election outcomes. Spread: 1-3 cents. Volume: 100K+ contracts. Tier 2: State-level election contracts, monthly CPI, NFP. Spread: 3-7 cents. Tier 3: Niche weather events, obscure corporate events. Spread: 10+ cents. Start in Tier 1.
Cost of Spread Over Many Trades
If you trade 20 contracts per month with an average 4-cent spread and $0.50 average entry price, you're paying 8% round-trip cost. Over 12 months with $1,000 deployed, that's $80/year in pure spread costs before any winning or losing. High-frequency PM trading requires very liquid markets.