Will Kalshi and Polymarket win over prop shops? Don't bet on it.

Prediction markets have grown in popularity since the 2020 election. Platforms like Kalshi and Polymarket now handle millions in volume on political and economic contracts. Institutional money has stayed away.

Prop shops and hedge funds that make markets in traditional assets face a key problem. Liquidity on these venues is too thin to run standard automated models. Volumes spike around binary events like elections and Fed decisions, then collapse. A firm needs consistent two-way flow and tight spreads to earn back the spread. The feast-or-famine pattern does not justify the engineering cost of connecting to a new venue and building risk models.

One head of a volatility fund told Risk.net that the total addressable volume across all prediction markets is smaller than a single mid-cap stock's average daily turnover.

Settlement is another hurdle. Prediction contracts resolve to 0 or 1 based on a real-world outcome. There is no continuous price. A market maker cannot delta-hedge the way it would with an option or futures contract. Gamma is extreme near the resolution date. There is no underlying to trade against. A few large bets can swing the entire book.