How Liquidity Impacts Prediction Markets and Trading Results
Liquidity impacts prediction markets by distorting headline prices, causing slippage on larger orders, and making exits costly, which means displayed prices often do not reflect actual fill prices. Even when a market looks mispriced, thin order books can erase the edge once you account for spread, depth, and the difficulty of exiting a position. Available liquidity often becomes the binding constraint before a trader's predictive model matters. For market makers, illiquid prediction markets may not justify participation, since simply providing liquidity is not an edge when informed traders can trade against you. Historical analysis also suffers, since screenshots of profits hide whether liquidity disappeared before resolution.
