Definition
Liquidity in prediction markets describes how easily and cheaply you can enter or exit a position. A liquid contract has many orders at many price levels — you can buy or sell a large quantity without significantly moving the price. An illiquid (thin) contract has few orders, so even a small trade can shift the price substantially.
What determines liquidity
- Market interest: High-profile events (Presidential elections, Fed decisions, Bitcoin ETF) attract more traders and more market maker capital
- Time to resolution: Liquidity typically peaks close to the resolution date as uncertainty concentrates
- Price level: Contracts near 50/50 (maximum uncertainty) tend to be more liquid than extreme-probability contracts (e.g., contracts priced at $0.02 or $0.98)
Liquidity and arbitrage position sizing
In arbitrage, your maximum position size is constrained by the available liquidity at the quoted price on both legs. If Polymarket's order book shows $1,200 available at $0.47 and Kalshi shows $800 available at $0.51, the maximum profitable trade is the smaller of the two — $800. Attempting to fill more moves the price and degrades your edge.
Liquidity asymmetry between platforms
Polymarket and Kalshi often have different liquidity depths for the same event. One platform may show $5,000 at the quoted price; the other only $500. Arbitrage Agent reads both order books in real time and sizes each trade to the binding constraint — the shallower side.