Market Makers
Definition
A market maker is a trader that posts both buy and sell quotes, standing ready to trade with anyone who wants immediate execution. The CFTC describes a market maker as a dealer or exchange participant that buys when there are excess sell orders and sells when there are excess buy orders, compensated by 'maintaining an offering price sufficiently higher than their buying price.' In prediction markets they earn the spread, fee rebates and incentive payments, and carry the risk of holding inventory when outcomes resolve.
Why it matters
Market makers set the spread and depth every other trader pays. Their incentives, rebates and any affiliation with the venue affect prices. Investors should know whether a venue publishes its market-maker terms, expect quotes to thin out around news, and remember that the counterparty to a quick fill is often a professional.
Common misconceptions
- •A venue that does not take sides can still have an affiliated market maker trading on it.
- •Rebates mean the fee a taker pays partly funds the market maker on the other side.
- •Quotes can vanish at the moment liquidity is most needed.
- •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
Polymarket programs (documentation read 2026-11-06)
Maker rebates: paid daily in pUSD, funded by taker fees; markets with 0% taker fee earn no maker rebate; $1 minimum payout.
Liquidity rewards: paid daily at midnight UTC to makers quoting within a market's maximum spread and above its minimum size.
Market maker economics (illustrative)
Quote 61 bid, 63 ask on 1,000 contracts each side.
If both sides fill, the maker earns 2 cents x 1,000 = $20 plus any rebate.
If only the bid fills and the event resolves no, the maker loses $610 on the inventory.
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
- Who supplies liquidity in prediction markets?
- Professional market makers, venue-affiliated firms and other traders who post resting limit orders. Polymarket pays daily maker rebates funded by taker fees, 'based on the share of liquidity you provided that actually got taken,' and separate liquidity rewards for 'passive, balanced quoting tight to a market's midpoint,' with a minimum order size and maximum spread set per market and a $1 minimum payout.
- What do Kalshi's market makers receive?
- That is not public. AltStreet's Kalshi review found that the rebate, discount and fee-revenue-share terms offered to market makers, including affiliate Kalshi Trading LLC, are not published, 'so the effective fee schedule paid by the other side of your trade is unknown.'
- What risk does a market maker carry?
- Inventory and adverse selection. A market maker that buys yes from a seller holds the position until it can sell or the market resolves. If the sellers knew something, the market maker loses: in a binary market that loss can be the whole position. Market makers widen spreads or withdraw quotes when they fear better-informed traders.