Arbitrage and Execution Risk
Definition
Arbitrage in prediction markets is buying and selling equivalent positions on different markets or venues to lock in a profit from a price difference. It is risk-free only if the positions are truly equivalent and both legs can be executed at the quoted prices. Execution risk is the risk that one leg fills and the other does not, fills at a worse price, or settles differently or later.
Why it matters
Apparent arbitrage is usually compensation for real risks: rule mismatch, execution, timing and custody. Investors should compare the full rules of both contracts, price both legs at executable size after fees, and treat any remaining gap as payment for those risks rather than as free money.
Common misconceptions
- •Identical titles do not mean identical contracts.
- •Gaps under a few cents are usually consumed by fees and spreads.
- •Locked capital in two venues has an opportunity cost.
- •The label is only a starting point. Investor outcomes usually depend on the governing documents, cash-flow priority, valuation policy, disclosure quality, and manager discretion surrounding the term, not just the shorthand definition used in marketing materials.
Technical details
Worked example (illustrative): cross-venue pair, 100 contracts each
Venue A yes at $0.55; Kalshi standard fee $1.74.
Venue B no at $0.42; Polymarket finance-category fee about $0.97.
Total $99.71 for a $100.00 payout: a $0.29 gross margin.
Any slippage, a partial fill or a resolution mismatch removes it.
How investors apply the term
Investors usually apply this term by tying the definition back to the controlling documents and then asking which cash flows, rights, restrictions, or valuation assumptions it changes. A useful review looks at the term alongside fees, leverage, liquidity, reporting frequency, and manager discretion rather than treating it as a standalone concept.
The practical diligence test is simple: identify who benefits if the assumption is wrong, who has control when conditions change, and what evidence the investor receives after closing. Terms that cannot be reconciled to documents, cash movements, and monitoring data should be treated as marketing shorthand until proven otherwise.
Frequently asked questions
- Is a price difference between two event markets risk-free arbitrage?
- Rarely. Suppose one venue offers yes at 55 cents and another offers no on what looks like the same event at 42 cents. Together they cost 97 cents for a $1 payout. Add Kalshi's standard fee on the yes ($1.74 per 100) and a Polymarket finance-category fee on the no (about $0.97 per 100) and the cost is $99.71 per $100, leaving 29 cents before any spread, slippage or delay.
- What is the biggest risk?
- That the two contracts are not the same. AltStreet's Polymarket review notes that 'two markets with identical titles on different venues can settle differently,' because rules, sources and resolution processes differ. If one resolves yes and the other resolves no as well, both legs lose.
- What else can go wrong?
- One leg can fill and the other not, leaving an open position; prices can move between legs; capital is tied up in two venues until both settle, possibly days apart; and on-chain settlement adds conversion and withdrawal steps. Kalshi combos are priced by request for quote and 'fills are not guaranteed.'