Comment by hammock
3 days ago
This is true if the stock market as well. There is insider trading. But that vast, vast majority of profits are made by the market makers (citadel etc).
3 days ago
This is true if the stock market as well. There is insider trading. But that vast, vast majority of profits are made by the market makers (citadel etc).
Is that the case? I would expect long-term investors would make more profits from the stock market than market makers.
If the market-makers are making vastly more than long-term investors (who are making trillions), who is coming in and venting off the multiple trillions to keep the system feeding long-term investors well while market makers gorge themselves?
It's simpler when looking at prediction markets because of bounded payoffs and the zero-sum nature, so these are pure trading gains.
In equity markets, you have both the trading and investment components to account for. Market makers like Citadel don't invest; they aim to exit positions as quickly as possible to minimize risk and capital requirements. Long-term investors commit capital to risky assets and are compensated with a risk premium (expected to be positive, but it can turn out to be negative). Usually, the "cost" of liquidity paid by long-term investors is tiny related to the overall expected returns. In prediction markets, you don't have that.
Yes to put the other comment into different words, vast maj the excess returns (alpha as opposed to beta ), or the “slack” in markets , however you want to think of it, are picked up by market makers.
Difference between prediction markets and stock markets is prediction markets on a flat road and stock market on an uphill road