Comment Text:
Dear Commissioners,
I am writing to share observations from my recent research, “A Microstructure Perspective on Prediction Markets” (SSRN), which has also been discussed in Bloomberg Opinion.
The core finding is straightforward: in the absence of hedgeable underlying assets, liquidity providers in event contract markets cannot remain neutral. Instead, they absorb order imbalances and retain outcome-dependent exposure through resolution. Profitability appears to depend less on spread capture and more on managing this terminal risk.
This implies that their economic role more closely resembles underwriting than traditional market making.
That distinction matters. Market participants may view these platforms as facilitating peer-to-peer exchange, when in practice they are often trading against professional counterparties with persistent, directional exposure. The lack of hedging changes both incentives and the nature of risk in ways that may not be immediately apparent.
As prediction markets continue to grow, it may be worth considering whether existing frameworks—largely developed for markets with hedgeable underlyings—fully capture these dynamics, particularly with respect to disclosure and how liquidity provision is characterized.
Thank you for your consideration.
Sincerely,
Nicholas Palumbo
