Removing the jargon surrounding contracts, order books, and event trading, Bernard Marantelli offers a straightforward explanation of the current dynamics within U.S. sports prediction markets. "Kalshi is a sportsbook that’s just not permitted to maintain an in-house risk team," states Marantelli, founder of White Swan Data, a specialized firm actively involved in market-making on prediction exchanges.
The key distinction lies in the risk management function. Traditional sportsbooks employ traders to set odds and handle exposure, whereas an exchange provides an API through which companies compete to quote prices and provide liquidity.
"Here’s an API. Bernard and 88 other people can market-make all these requests for quotes (RFQs)," Marantelli elaborates. The types of market-making participants vary; some focus on esports, while others may handle everything or concentrate on same-game parlays. Despite the differentiations, it all operates like a sportsbook.
The institutional framework often goes unnoticed by users who encounter a peer-to-peer (P2P) system. While retail users may appear to trade among themselves, the substantial depth required for mass-market appeal cannot solely depend on occasional customers. Continuous quoting and significant capital commitment from professional firms are essential.
White Swan, based in London, has emerged as a significant player, representing up to 40% of activity on several secondary exchanges with a particular focus on the RFQ parlay market. Marantelli describes this strategy saying, "Just better margins. I think it’s more defendable. It’s the area that fewer people can do well." As such, he sees better long-term contracts and advantageous positions in this market.
Single bets can be profitable, but pricing parlays necessitates that market makers compute correlations between multiple outcomes and dynamically react to individual requests. This complex skill has been honed in sophisticated sectors of the existing sports betting ecosystem.
Marantelli points to White Swan and Susquehanna as two firms operating at an industrial level in the parlay space, with Jump Trading, Mojo, and DL Trading among the leading groups following closely. Below them are many smaller syndicates, some managing between $5 million and $10 million, as well as sports-specific specialists.
The entry of major UK and European sharp-betting groups into U.S. prediction markets has been swift, according to Enda Kendrick, CEO of service provider Veltium. He notes that over 100 smaller entities, from individual traders to teams of around ten, are keen to engage in the regulated U.S. market.
The involvement of professional traders complicates the perception that prediction markets simply connect users willing to exchange opinions. Kendrick observes that ordinary customers are unlikely to place bets of $10 million or $20 million on teams like the Philadelphia Eagles, indicating the necessity for institutional participation at such scales.
Marantelli warns that customers could incur losses more quickly on exchanges compared to traditional sportsbooks. The perceived flexibility of entering and exiting positions might lead users to invest a larger portion of their bankroll. He explains that a customer might initiate a buy at 55 or 56 cents, hoping for a rise to 58 or 59 cents. However, if the price instead drops to 45 cents, the trader may refuse to cut their losses and continue holding the position.
"People will lose money faster on exchanges for lots of reasons," he asserts. Increased spending and volatility, along with the sharper audience in exchanges compared to sportsbooks like DraftKings, are contributing factors. He relates this to cash-out features in sportsbooks, which appear to give customers more control but might also spur greater spending. The critical distinction is that exchange users are often matched against specialists whose businesses revolve around identifying mispriced contracts.
Kendrick draws attention to the history of betting exchanges. In their early growth periods, the retail customer base supported multiple market makers in profitability. As retail liquidity diminished, sharper firms found themselves trading mainly among each other, diminishing their profit margins.
He likens this to a poker game where weaker players help sustain the game. If those players leave, even a skilled professional might end up losing due to heightened competition.
Despite these concerns, the vast addressable U.S. market and strong player recruitment continue to attract interest. Marantelli highlights that Kalshi quintupled its client base during the World Cup, with predictions that NFL prediction markets could generate $5 billion to $7 billion in liabilities within a week. Still, he notes that quicker losses for customers could threaten the model's sustainability, stating, "If the recruitment of players dries up, then what are you going to do?"
At present, however, the expansion allows room for multiple market makers. Marantelli expects profit margins to remain favorable as the market grows, though they may contract as competition increases. The nuanced RFQ and parlay segments may offer relative protection against margin compression.
In sum, the landscape is evolving into an ecosystem that resembles an outsourced sportsbook trading room rather than a casual marketplace for predictions. While exchanges attract customers, specialized firms take on the complex task of pricing risk and supplying the necessary capital to keep the markets operational.
