Bertrand Marantelli offers a straightforward perspective on the dynamics of US sports prediction markets. "Kalshi is a sportsbook that’s just not allowed to have an in-house risk team," explains Marantelli, the founder of White Swan Data, a company actively engaged in market-making on prediction exchanges.
The crux of the matter lies in the differences in risk management between sportsbooks and exchanges. A traditional sportsbook hires traders to set prices and manage risk, while an exchange operates through an API that allows various firms to compete for pricing and liquidity.
"Here’s an API. Bernard and 88 other people can market-make all these request-for-quotes (RFQs)," Marantelli states, highlighting the diverse strategies traders can adopt. Some specialists might focus solely on esports, others on broad offerings, and yet some may zero in on same-game parlays, all within what he describes as a sportsbook framework.
To the average customer interacting with a peer-to-peer model, the institutional layer remains largely hidden. Although retail users may appear to trade amongst themselves, the liquidity required for widespread participation cannot come solely from casual customers. Professional firms must consistently offer quotes and be willing to invest significant capital.
White Swan Data is a notable market maker, contributing up to 40% of activity on selected secondary exchanges, with a specialization in the RFQ parlay market. Marantelli justifies this focus: "Just better margins. I think it’s more defendable. It’s the area that fewer people can do well. So I think it’s more defendable margin, more ability to get long-term contracts and beneficial positions."
Though single bets can yield profits, pricing parlays necessitates that market makers assess correlations between different outcomes and react in real-time to requests. This expertise is cultivated through years in the competitive realms of modern sports betting.
Marantelli draws attention to his firm and Susquehanna as operating effectively on a large scale within the parlay market, alongside Jump Trading, Mojo, and DL Trading among other key players. Below them lie smaller syndicates, some managing between $5 million and $10 million, along with various sports-focused specialists.
The surge of UK and European betting firms into US prediction markets is evident, according to Enda Kendrick, CEO of the service provider Veltium, who notes that there are more than 100 smaller entities, ranging from individual traders to small teams, eager to enter this regulated space.
However, the strong presence of professional firms complicates the apparent simplicity of prediction markets allowing casual users to trade opinions. Kendrick notes that two everyday customers are unlikely to wager $10 million or $20 million on the Philadelphia Eagles, as transactions of that magnitude require institutional participation.
For Marantelli, while the exchange format offers flexibility that may initially appeal to users, it could result in quicker losses than traditional sportsbooks. The ability to move in and out of positions can mislead users into extensive betting behaviors, leading to significant bankroll commitments.
He illustrates the scenario: a customer might purchase shares in a team at 55 or 56 cents, hoping for a price increase to 58 or 59 cents. If the price drops to 45 cents, the trader may hesitate to cut losses and continue holding the position.
“People will lose money faster on exchanges for lots of reasons,” Marantelli says. “It inherently increases spend, volatility, lots of things. And you’re playing against a sharper audience than you’re playing against at the DraftKings sportsbook.”
He draws a parallel with sportsbook cash-out features, which seem to give users more control over their bets but can also lead to increased spending. The key distinction is that exchange participants may face specialists whose business revolves around identifying inaccurately priced contracts.
Kendrick warns about the lessons learned from the early growth phases of betting exchanges. Initially, the retail liquidity supported various market makers. When that liquidity diminished, sharper firms found themselves pitted against one another.
His analogy likens it to a poker table where weaker players sustain the game. If they leave, even the fourth-best player risks losing when facing the top three.
Despite these challenges, the potential market in the US is colossal, and there remains robust interest in recruitment. During the World Cup, Marantelli indicates that Kalshi expanded its client base fivefold. He estimates that NFL prediction markets could carry liabilities ranging from $5 billion to $7 billion in a single week.
Yet, he acknowledges that accelerated customer losses could impact the long-term viability of this business model. "They lose quicker, dry up quicker, recruitment or re-recruitment. If the recruitment of players dries up, then what are you going to do? Definitely there can be components like that."
Currently, there is ample room for multiple market makers. Marantelli predicts healthy margins during this growth phase before they tighten as competition escalates. The intricate RFQ and parlay markets may provide the strongest buffer against this compression.
The evolving landscape resembles less a casual trading environment among millions of users and more of an outsourced trading room for sportsbooks. While exchanges attract clients and provide the platforms, specialized firms manage risk and supply necessary capital to maintain market operations. Marantelli succinctly sums it up: "Let’s call a spade a spade."
