The competition within prediction markets is becoming increasingly apparent. Companies like Kalshi and Polymarket, along with newer players, are expanding their offerings in sports prediction products. Established names such as DraftKings, Flutter, and Robinhood are investing in market-making capabilities and distribution infrastructures.
A report from Jefferies in September highlighted that sports have emerged as the primary driver of liquidity in prediction markets, with combo and parlay-style contracts growing in popularity among users. However, analysts warned that these markets operate on a scale model characterized by relatively low revenue yields, meaning their financial viability relies heavily on ongoing liquidity, user engagement, and trading transactions.
James Monk, founder of Catalist Sports, a provider of sports data and streaming services, has experienced this reliance on liquidity firsthand. Catalist supplies data for ITF tennis events to both Kalshi and Polymarket and holds an exclusive sports-streaming agreement with Kalshi.
To ensure the markets are active, Catalist must also provide data to market makers who require it to inform their trading models. Monk explained, "If we just sold the data to Kalshi in order to list the markets but no one was coming in and placing liquidity, there’s no point in them listing the markets. We also need to supply the data to the market makers to inform their models."
Initially, Catalist had fewer than 10 potential market makers engaging with it, but that number has grown significantly, with close to 20 agreements completed and another 20 in discussions. This surge corresponds with the increasing range of sports contracts available; the ITF tennis tour, for instance, includes more than 60,000 matches each year, many of which are not televised, making it crucial to rely on official data.
The integration of streaming into prediction market interfaces is evolving. Monk noted that platforms have shifted from a pure trading focus to incorporating elements like streams and player propositions resembling those found in sportsbooks. "It was still very much a trading kind of UX," he said about Kalshi at the beginning of the year. "The actual product offering has come a long way."
Andrew Gonzalez, founder of the prediction market infrastructure startup ParlayX, emphasized that small teams' ability to provide liquidity is a defining characteristic of the sector, stating, "Anyone can be a market maker. You have these two- or three-man shops." Jefferies described these market makers as the "liquidity backbone" of the ecosystem, posting executable bids and offers, managing inventory, and ensuring the pricing remains stable even when customer activity is heavily skewed.
The report indicated that operators managing a successful exposure could generate significant net economics on trades, although returns are not guaranteed. Adverse price movements can negate earnings from spreads and incentives. Despite the growing interest in prediction markets, the necessary operational infrastructure is still lacking in this niche.
Gonzalez provided a comparison to equities, where firms benefit from established systems such as prime brokers and clearinghouses, which are not available in prediction markets. He highlighted issues like teams sharing single login credentials, which complicate operations as they grow.
In response, ParlayX is working on developing individual logins and subaccounts for teams to facilitate better operational structure. Other challenges include the need for unified execution across different exchanges and common standards for resolution since a contract on one platform cannot easily transfer to another.
Liquidity plays a crucial role in reinforcing itself, with market makers drawn to platforms that provide reliable technology and substantial order flow. This interaction can enhance pricing and execution for consumers. Sahil Patel, founder of Aldrin AI, pointed out that market makers gravitate towards platforms like Kalshi due to its stable technology and strong maker relationships. He referred to Kalshi as a "freight train that’s just kind of running away with it."
According to Patel, Aldrin monitors various factors such as product changes and trading volumes across prediction operators to illustrate how advertising impacts performance in terms of volume and market share. There is intense competition among operators for a slice of this rapidly expanding market, with even 1% of market share seen as a substantial opportunity.
Jefferies estimates that exchanges retain around 65% of transaction fees, with the remainder going to clearinghouses and liquidity providers. As a result, it's expected that many operators will start to internalize parts of their infrastructure. However, for the independent suppliers growing alongside the platforms, every new exchange, contract, and market maker contributes to expanding opportunities. While consumer-facing platforms draw users, those markets cannot thrive without the data, liquidity, and operational frameworks being developed behind the scenes.
