How do fees and platform rules affect prediction market prices?
Fees and platform rules directly affect pricing by widening spreads, discouraging arbitrage, and biasing prices away from theoretical probabilities.
Detailed Explanation
Transaction fees:
- Every trade incurs costs (maker/taker fees, withdrawal fees)
- These costs are effectively subtracted from expected value
- Small-edge trades become unprofitable after fees
Spread widening:
- Market makers price in fees when setting bid/ask
- Higher fees → wider spreads → less efficient pricing
Arbitrage friction:
- Cross-platform arbitrage is limited by withdrawal delays and fees
- Mispricings can persist longer than in low-fee environments
Resolution rules:
- Ambiguous resolution criteria create uncertainty premium
- Platforms with unclear rules see prices that don't reflect pure probability
Common Scenarios
- Comparing the same event across platforms with different fee structures
- Evaluating whether a 3% edge is worth pursuing after 2% round-trip fees
- Noticing persistent price differences between platforms
- Adjusting position sizing to account for fee drag
Exceptions & Edge Cases
- If the platform offers fee rebates or maker incentives, then effective costs may be lower than posted.
- If resolution rules are vague, then prices may embed a "resolution risk" premium unrelated to event probability.
- If withdrawal is restricted or slow, then capital is trapped and can't correct cross-platform mispricings.
Practical Examples
Market: "Fed cuts rates by March 31"
- Platform A: 60¢ with 1% fee → net expected payout if Yes = 59¢
- Platform B: 58¢ with 3% fee → net expected payout if Yes = 55¢
- Same event, different effective prices due to fee structure
Market: "Company announces acquisition by EOY"
- Resolution rules unclear on what counts as "announcement"
- Price trades at 35¢ instead of 40¢ due to resolution uncertainty
Actionable Takeaways
- ✅ Understand platform-specific rules
- ✅ Prefer markets where costs are small relative to edge
- ✅ Avoid marginal EV trades
- ✅ Always net prices of fees
