How does an order book work on a prediction market?

Buyers post the most they'll pay for a yes contract and sellers post the least they'll accept. The gap between the best of each is the spread. A trade happens when someone crosses it, accepting a resting price instead of posting their own. Thin markets have wide spreads; busy ones have tight spreads.

What happens when a sports contract settles?

When the outcome is official, every yes contract pays its full value if the event happened and nothing if it didn't, straight to whoever holds it at that moment. Nobody has to agree or approve anything. The game itself is the referee.

Can you sell a prediction market position before the game ends?

Yes, and that's the defining difference from a fixed ticket. Positions can be sold at the current market price any time before settlement, which means you can take a profit, cut a mistake, or exit when news changes the picture. The exit door is what makes it trading rather than holding.

The beginner's guide · Chapter 2 of 9

How sports prediction markets work: orders, spreads, settlement

The order book is just a queue of opinions with money attached.

Strip the jargon and an exchange is a queue. On one side, people saying “I’ll buy yes at 61¢ or less.” On the other, “I’ll sell yes at 64¢ or more.” The exchange lines them up, best price first, and waits. That waiting list is the order book.

The book is just resting intentions: people willing to sell YES above, people willing to buy it below. The gap between the best of each (the spread) is where the market admits it isn't sure. Illustrative numbers.

The gap in the middle (best buyer at 61¢, best seller at 64¢) is the spread, and it is the market being honest about its own uncertainty. Nobody currently disagrees strongly enough to trade. You have two moves against a spread: post your own order inside it and wait for someone to come to you, or cross it and pay the resting price for the privilege of trading right now. Beginners cross constantly, out of impatience. Each cross costs a cent or three, and cents are percents. Patience is the first edge anyone develops, and it is free.

Settlement: the game is the referee

When the result is official, the market settles. Yes contracts pay out in full if the thing happened; they expire worthless if it didn’t. No negotiation, no judgment call, no house deciding. The scoreboard is the oracle. This is why contract questions are written with lawyerly precision (this team, this game, this date): at settlement there is no room for “well, what we meant was.”

A contract's whole life. Unlike a fixed ticket, you can exit at the market price at any point before settlement. That exit door is what makes it trading.

The exit door

Between open and settlement, the price never stops moving. Injuries, weather, lineups, the actual game unfolding play by play. Because you can sell at any moment, you are never married to your Tuesday opinion on Saturday. Bought at 62¢ and it’s 80¢ at the half? You can take the 18¢ and watch the fourth quarter as a civilian. Down to 40¢ because the quarterback is in street clothes? You can cut it and keep the 40 rather than ride to zero. A fixed ticket offers neither mercy.

The exit door is the product. Everything else is a queue with better marketing.

One habit to build immediately: before you ever place an order, write down the probability youbelieve, then look at the price. If you can’t name your own number first, the market will happily name it for you. Chapter 3 is about learning to speak that language fluently.

Frequently asked questions

How does an order book work on a prediction market?: Buyers post the most they'll pay for a yes contract and sellers post the least they'll accept. The gap between the best of each is the spread. A trade happens when someone crosses it, accepting a resting price instead of posting their own. Thin markets have wide spreads; busy ones have tight spreads.
What happens when a sports contract settles?: When the outcome is official, every yes contract pays its full value if the event happened and nothing if it didn't, straight to whoever holds it at that moment. Nobody has to agree or approve anything. The game itself is the referee.
Can you sell a prediction market position before the game ends?: Yes, and that's the defining difference from a fixed ticket. Positions can be sold at the current market price any time before settlement, which means you can take a profit, cut a mistake, or exit when news changes the picture. The exit door is what makes it trading rather than holding.

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