Market Making
Market making is the practice of simultaneously offering both back and lay (buy and sell) odds on a betting exchange or prediction market to capture the spread.
Quick Definition
Market making in sports betting and prediction markets is the act of providing liquidity by placing both buy (back) and sell (lay) orders at different prices. The goal of a market maker is to capture the difference between these two prices—known as the bid-ask spread—without holding a directional bias on the outcome of the event. By constantly quoting odds on both sides of the market, market makers ensure that other retail traders can execute transactions instantly.
How Market Making Works: The Spread
A market maker acts as a middleman. Instead of trying to predict who will win a match, they profit by buying low and selling high.
In prediction markets or exchanges:
- The Bid (Back): The price at which the market maker is willing to buy a contract.
- The Ask (Lay): The price at which the market maker is willing to sell a contract.
Example of capturing the spread:
On a prediction market for a political event:
- The market maker places a buy limit order (Bid) to acquire “Yes” contracts at 50¢.
- Simultaneously, they place a sell limit order (Ask) to sell “Yes” contracts at 52¢.
- If both orders are matched by retail traders, the market maker has bought a contract for 50¢ and sold it for 52¢.
- Profit: A risk-free 2¢ per share, regardless of who wins the actual election.
While a 2¢ profit per share seems small (4%), executing this across millions of shares daily creates massive, low-risk revenue.
The Mechanics of Inventory Risk
Market makers face one primary threat: inventory risk (also known as adverse selection). This occurs when the market moves rapidly in one direction, and the market maker gets filled on only one side of the book, leaving them with an unwanted, unhedged position.
Adverse Selection Example:
Imagine you are market making a tennis match:
- You quote Back (Buy) at 2.00 and Lay (Sell) at 2.05.
- Suddenly, one of the players twists their ankle.
- Sharp traders (using bots or fast feeds) immediately match your Back order at 2.00 before you can cancel it.
- You are now holding a bet on a player who is injured, and you cannot lay it off at 2.05 because the market has crashed to 5.00.
To manage inventory risk, professional market makers use complex algorithms that monitor live data feeds, automatic stop-loss hedging, and fast cancellation mechanisms.
Market Making in Traditional Bookmakers vs. P2P Exchanges
| Feature | Traditional Bookmakers | P2P Market Makers |
|---|---|---|
| Entity | The sportsbook company (e.g., DraftKings, Bet365) | Independent traders, algorithmic funds, or specialized firms |
| Model | Holds the risk directly, offsets via overround/vig built into lines | Neutralizes risk by balancing buy and sell orders |
| Access | Private, proprietary trading platforms | Open API access on exchanges (Betfair, Smarkets) and prediction markets (Polymarket) |
| Profiting Method | Charging a high vig (typically 4% to 8%) on all bets | Capturing the spread and earning liquidity incentives/rebates |
How to Get Started with P2P Market Making
Advanced bettors can engage in market making on modern exchanges and prediction markets using programmatic API tools. Here is how the process is structured:
- Establish API Connections: Connect trading software or custom scripts to the exchange’s REST and WebSocket API endpoints (e.g., Betfair API-NG or Polymarket API).
- Deploy Quoting Algorithms: Program a bot to dynamically place buy and sell orders. The bot must automatically adjust its prices as the mid-market price moves.
- Assess the Spread: Target markets with wide spreads and moderate volume. Extremely tight markets (like Premier League match winners) have thin spreads and are dominated by institutional firms, leaving little room for retail makers. Niche markets offer wider spreads but lower volume.
- Hedge Inventory: Code logic to offset unbalanced inventory. If the bot accumulates too many “Yes” contracts, it must automatically lower its bid to stop buying and lower its ask to encourage selling, or hedge on a secondary book.
Related Terms
- Liquidity - The volume of orders that market makers provide and rely on to clear trades.
- Betting Exchange - The peer-to-peer venue where market making occurs.
- Prediction Market - Event contract markets that frequently incentivize market makers via liquidity pools.
- Lay Betting - The sell side of the order book, essential for quoting a two-sided market.