Understanding Prediction-Market Liquidity

An arbitrage only exists at a price you can actually get. Liquidity determines that.

What liquidity limits

Your size on each leg is bounded by the depth behind the quote:

Max Contracts = min(Liquidity A / Price A, Liquidity B / Price B)

The thinner leg caps the whole trade. A beautiful 8% spread on a $400 book is a $400 opportunity, not a $40,000 one.

Slippage

Quoted prices are usually the best bid or ask for a small size. Buy more and you walk up the book, paying worse prices on each increment. By the time you've filled both legs, the realized combined cost may be materially higher than the screen price. GapWatch's liquidity rating and maximum-size figure exist to keep the headline spread honest.

Bid-ask spread

Even without size, you pay the spread between bid and ask on entry. A $0.52/$0.53 quote means the market instantly costs you a penny per contract. Wide bid-ask spreads quietly turn 5% gross opportunities into 2% net ones.