Bernard Marantelli, founder of White Swan Data, offers a straightforward characterization of the inner workings of sports prediction markets in the U.S.: "Kalshi is a sportsbook that’s just not allowed to have an in-house risk team." This encapsulation highlights a fundamental distinction in the gambling landscape, where traditional sportsbooks manage risks through traders while exchanges facilitate market-making via APIs that allow competition in pricing and liquidity provision.
Marantelli elaborates, explaining how numerous firms, including White Swan, can participate in market-making. "Here’s an API. Bernard and 88 other people can market-make all these request-for-quotes (RFQs)," he notes. Individual firms may specialize in particular areas—for instance, some may focus solely on esports or single-game parlays—while others engage broadly in various betting options. Nonetheless, the essence remains: these exchanges operate like sportsbooks.
The intricate framework behind these exchanges often goes unnoticed by retail consumers, who engage in what appears to be a peer-to-peer betting environment. However, for a robust mass-market product, casual bettors alone cannot fulfill the necessary market depth; professional firms must continuously quote prices and invest considerable capital.
White Swan has established itself as a key player, accounting for around 40% of activity on certain secondary exchanges, particularly in the RFQ and parlay markets. Marantelli asserts that this focus on parlays is strategic. "Just better margins," he comments. “I think it’s more defendable. It’s the area that fewer people can do well.” The complexities of pricing parlays, which involve calculating the correlations among various outcomes, require expertise developed through years in competitive sports betting.
Marantelli identifies White Swan and Susquehanna as leading firms in this niche, while Jump Trading, Mojo, and DL Trading are also notable players. Beneath them operate numerous smaller syndicates, each often managing between $5 million and $10 million, alongside specialists targeting specific sports.
The movement of established UK and European betting firms into U.S. prediction markets is accelerating, as noted by Enda Kendrick, CEO of Veltium. He estimates that over 100 smaller entities, from individual traders to small teams, are considering entry into the regulated U.S. market.
However, the presence of these professional counter-parties complicates the perception that prediction markets are a straightforward trading platform for everyday users. Kendrick highlights that casual bettors typically do not risk $10 million or $20 million on a team like the Philadelphia Eagles, underlining the necessity of institutional players for such high-stakes markets.
Marantelli warns that the exchange format can lead to quicker losses for customers compared to traditional sportsbooks. The flexibility of entering and exiting positions might encourage users to risk more of their bankroll. For example, a customer could purchase a bet at 55 or 56 cents, aiming for an increase, but might face a fall to 45 cents instead, leading them to hold onto the position out of reluctance to accept losses.
He explains, "People will lose money faster on exchanges for lots of reasons. It inherently increases spend and volatility. And you’re playing against a sharper audience than you’re playing against at the DraftKings sportsbook." Similar to cash-out features offered by sportsbooks that grant a perceived layer of control yet encourage higher spending, the sophistication of exchange users can overwhelm casual gamblers, who may not realize they're competing against more experienced players skilled at identifying mispriced wagers.
Kendrick cautions against forgetting the lessons from past betting exchanges. Initially, the influx of retail liquidity allowed numerous market makers to be profitable, but as that pool diminished, the stronger firms found themselves pitted against one another, leading to losses for some. He likens it to a poker table where the absence of weaker players can shift the balance unfavorably for stronger ones.
Despite these challenges, the U.S. market presents a considerable opportunity, and customer acquisition remains strong. Marantelli reports that Kalshi experienced a fivefold increase in clients during the World Cup. He projects that NFL prediction markets could potentially generate between $5 billion and $7 billion in a single week. Still, he acknowledges the risks of faster customer losses undermining the model's long-term viability, stating, "They lose quicker, dry up quicker, recruitment or re-recruitment. If the recruitment of players dries up, then what are you going to do?"
Ultimately, as growth unfolds, various market makers can thrive side by side. Marantelli anticipates that while margins will remain favorable during this growth phase, they may compress as competition heightens. The complexity of RFQ and parlay markets might provide an edge against that trend.
In this emerging landscape, the image looks less like a casual exchange among millions of users and more akin to an organized sportsbook trading room. The exchanges handle the platform and customer outreach, while specialized firms assume responsibility for pricing risks and ensuring the necessary capital is available to sustain these markets. "Let’s call a spade a spade," Marantelli concludes.
