In the evolving landscape of US sports prediction markets, Bernard Marantelli provides a straightforward perspective: "Kalshi is a sportsbook that’s just not allowed to have an in-house risk team." Marantelli is the founder of White Swan Data, which plays an integral role in facilitating markets on prediction exchanges.
The distinctiveness of this setup lies in how risk is managed. Traditional sportsbooks hire traders who price bets and handle risk exposure, while the exchanges, like Kalshi, simply supply an API. This tool enables firms to compete in quoting prices and supplying liquidity.
Marantelli elaborates, "Here’s an API. Bernard and 88 other people can market-make all these request-for-quotes (RFQs)." Participants include specialists focusing on sectors such as esports or parlay betting, illustrating the diversity in market engagement.
Though retail users interact through a P2P model, the actual depth needed for a widespread product comes from institutional players willing to make continuous quotes and allocate significant capital. White Swan, for example, constitutes about 40% of the activity on certain secondary exchanges, predominantly focusing on RFQ and parlay markets.
Marantelli highlights the advantage of this niche, stating, "Just better margins." His belief is that the parlay market is less competitive and thus provides more sustainable profit opportunities. Unlike single bets, where profitable pricing may be easier, calculating correlations between multiple outcomes in parlays is a more intricate task that demands expertise developed through extensive experience in the sports betting sphere.
He identifies White Swan and Susquehanna as major players in the parlay market, with Jump Trading, Mojo, and DL Trading also among the frontrunners. Other smaller syndicates are entering the market, some trading capital between $5 million and $10 million.
Enda Kendrick, CEO of Veltium, indicates that numerous UK and European sharp-betting firms have quickly moved into US prediction markets, estimating that over 100 smaller entities—ranging from single traders to teams—are eager to participate in the regulated market.
However, the influx of professional firms complicates the perception of prediction markets as platforms where users trade opinions among themselves. Kendrick points out that it’s unrealistic for two casual customers to bet sums as large as $10 million or $20 million on the Philadelphia Eagles, emphasizing that institutional participation is crucial for maintaining market viability.
Marantelli warns that the exchange format could potentially lead to customers suffering losses more rapidly than they might with conventional sportsbooks. The flexibility to enter and exit positions may prompt users to invest greater amounts of their bankroll. For instance, if a customer buys a team share at 55 cents in hopes it will rise to 59 cents, they might hesitate to accept a loss if it falls to 45 cents.
"People will lose money faster on exchanges for lots of reasons," he observes, outlining how this dynamic can exacerbate spending and increase volatility. He compares this outcome to the cash-out features seen at traditional sportsbooks, which, while seemingly empowering for customers, can lead to higher expenditures by fostering a false sense of control.
History serves as a cautionary tale for betting exchanges. Kendrick notes that during the early growth of such platforms, a robust retail liquidity allowed for the success of various market makers, but as that pool dwindled, competition among professional firms intensified. He likens this scenario to a poker game where weaker opponents support the profitability of stronger players; without them, even the best traders can find themselves at a disadvantage.
Despite the challenges, the US market remains expansive, with strong recruitment still ongoing. Marantelli mentions that Kalshi saw a fivefold increase in clients during the World Cup and suggests that NFL prediction markets could incur liabilities between $5 billion and $7 billion in a single week. However, he recognizes that if customers start losing money rapidly, it could test the endurance of the market model.
"They lose quicker, dry up quicker, recruitment or re-recruitment," Marantelli cautions. A dip in player recruitment would pose significant issues for market sustainability.
Currently, the growth of the sector allows several market makers to thrive. Marantelli anticipates that margins will remain healthy during this growth phase before tightening as competition grows. The more intricate RFQ and parlay markets are likely to offer some defense against this shrinkage.
Ultimately, the current ecosystem resembles an outsourced sportsbook trading room rather than a casual trading environment. Exchanges handle the platforms and customer acquisitions, while specialized firms manage pricing and the necessary capital for market functionality. Marantelli sums up this reality succinctly: "Let’s call a spade a spade."
