Really clear framing of how people make and lose money on PMs! Do you think there's ever a symbiotic relationship between dealers and sharps? Sometimes on a fresh Kalshi market a market maker bot will post super naive wide quotes but at small size, and I'll do some research to get a rough FV. I'll keep taking their liquidity and they'll instantly re-quote until eventually their quote seems reasonable. It seems like they're compensating me to inform them about fair value so eventually they can post deeper liquidity once square flow picks up (usually closer to some event)
From a market ecosystem and market quality perspective I think it’s good to have both. Though from my personal experience as a market-maker I never wanted to do bad trades for any size! One important quality for a trader is updating quickly when the world is telling you you’re wrong, and thinking hard about your counterparties. If you believe for some time period you're mostly trading with sharps - but find the price at which flow starts to go both directions, that's probably a decent estimate. You do still have to hope softer flow eventually shows up - on some of these less traded markets there's no guarantee and the MM might just end up losing.
I’m not much of a sports bettor but having read about that world it sounds like the sharp books will open lines early for small size, knowing that sharps will hit them small and they incorporate that info into their prices, and then by the time the game rolls around the price has been firmed up and bigger size is available. This sounds more like what you’re describing but is second-hand knowledge to me.
Great viewpoints. Question for you, how does Kalshi’s regulatory status as a CFTC-regulated exchange conflict with the practice of profiling individual traders, and where is the legal line between risk management and discriminatory execution?
Really clear framing of how people make and lose money on PMs! Do you think there's ever a symbiotic relationship between dealers and sharps? Sometimes on a fresh Kalshi market a market maker bot will post super naive wide quotes but at small size, and I'll do some research to get a rough FV. I'll keep taking their liquidity and they'll instantly re-quote until eventually their quote seems reasonable. It seems like they're compensating me to inform them about fair value so eventually they can post deeper liquidity once square flow picks up (usually closer to some event)
From a market ecosystem and market quality perspective I think it’s good to have both. Though from my personal experience as a market-maker I never wanted to do bad trades for any size! One important quality for a trader is updating quickly when the world is telling you you’re wrong, and thinking hard about your counterparties. If you believe for some time period you're mostly trading with sharps - but find the price at which flow starts to go both directions, that's probably a decent estimate. You do still have to hope softer flow eventually shows up - on some of these less traded markets there's no guarantee and the MM might just end up losing.
I’m not much of a sports bettor but having read about that world it sounds like the sharp books will open lines early for small size, knowing that sharps will hit them small and they incorporate that info into their prices, and then by the time the game rolls around the price has been firmed up and bigger size is available. This sounds more like what you’re describing but is second-hand knowledge to me.
Good piece
Great viewpoints. Question for you, how does Kalshi’s regulatory status as a CFTC-regulated exchange conflict with the practice of profiling individual traders, and where is the legal line between risk management and discriminatory execution?