Top quantitative firm Jump Trading enters the prediction market, is the era of retail investors over?

Author: Zhou, ChainCatcher

According to Bloomberg, the world's top quantitative trading firm Jump Trading will provide liquidity to the two leading prediction market platforms, Kalshi and Polymarket, in exchange for a small equity stake.

It is reported that the agreement with Kalshi involves a fixed equity share, while the stake in Polymarket will dynamically grow with the trading capacity provided by its U.S. operations.

For Jump Trading, this equity could potentially be quite valuable. Previous reports indicated that Kalshi is valued at around $11 billion and Polymarket at about $9 billion, with the sector still expanding rapidly.

Jump may deploy its dedicated team of over 20 people to provide professional market-making services to enhance the trading experience on the platforms and capture long-term potential returns.

1. Liquidity Bottlenecks in Prediction Markets

Liquidity has always been a key bottleneck for the growth of prediction markets.

As the current two leading players, Kalshi and Polymarket faced similar challenges in their early stages: trading volume surged during popular events, but non-popular contracts often had shallow depth and large spreads, making it easy for users to experience significant slippage on large orders, or even difficulty in executing trades.

Among them, Kalshi introduced the professional institution Susquehanna International Group (SIG) as its main institutional market maker in 2024.

SIG established a trading department focused on event contracts, leveraging its expertise as a veteran options giant with professional algorithms and continuous order placement capabilities, significantly improving the trading experience on Kalshi, especially in sports and economic data contracts.

In addition, Kalshi also provides some counterparty liquidity through internal related trading entities to stabilize pricing and fill gaps.

At the same time, the platform launched a liquidity incentive program, offering cash rewards, reducing fees, and relaxing position limits to further attract algorithmic players and large traders.

Polymarket's situation is more characterized by its crypto-native features. As an on-chain order book platform based on Polygon, it initially relied on decentralized incentive mechanisms to gather liquidity.

According to official documentation, the platform returns a portion of fees daily in USDC through the Maker Rebates program, attracting automated market-making bots and independent liquidity providers. These algorithmic players actively place orders on new markets or popular contracts to earn spreads and rebate profits.

However, this model also brings fragmentation and instability; for instance, when event popularity wanes, market-making bots may withdraw orders, leading to rapid widening of spreads and quick shrinkage of depth.

Additionally, Polymarket has also experimented with internal market-making teams and community-driven LP mechanisms, but overall, its liquidity shows sufficient depth during blockbuster events, while relying on retail and algorithmic short-term profit-seeking behavior during regular times.

The commonality between the two platforms at this stage is that liquidity is highly dependent on a few key participants and incentive-driven retail forces.

2. Exchanging Equity for Liquidity?

Although the prediction market sector is expected to experience explosive growth from 2024 to 2025, particularly driven by elections and sports events, it is essentially a relatively scarce liquidity emerging market, far from the depth and stability of traditional finance.

The ability of Kalshi and Polymarket to reach an equity-for-liquidity partnership with Jump Trading is fundamentally due to the high alignment of both parties' demands as the sector matures, which was nearly impossible to achieve in the early stages.

Now, after several years of development, the two platforms have accumulated considerable trading volume and valuation, but they have also exposed the limits of their incentive mechanisms.

Previously relying on cash subsidies, fee rebates, and community algorithmic players, while able to temporarily boost depth during blockbuster events, it has been difficult to form a lasting professional capacity.

The platforms are also aware that relying solely on these means is insufficient to support the transition from event-driven to daily infrastructure.

What they need is sustained, low-latency, rigorously controlled institutional-level market-making capabilities, which is precisely the area where traditional quantitative giants excel.

Although Kalshi and Polymarket currently have ample funding, cash cannot buy the long-term commitment of top market makers. Equity cooperation, on the other hand, directly binds interests: the platforms exchange a small equity stake for Jump Trading's core resources, effectively sharing future growth dividends with partners in advance.

Especially for Polymarket, as a native on-chain platform, the requirements for market makers regarding crypto infrastructure and on-chain execution experience are higher.

It is reported that Jump Trading established its crypto department in 2021 and has been deeply involved in the DeFi and Solana ecosystems. Therefore, it has accumulated rich practical experience in on-chain order books, low-latency market making, cross-chain asset management, and risk control, which aligns well with Polymarket's Polygon + USDC settlement model.

Jump Trading's motivations are equally clear. As a quantitative firm with strong infrastructure across multiple asset classes, including stocks, options, and crypto, it sees structural opportunities in prediction markets.

The model of exchanging equity for professional capacity is essentially a hybrid innovation of venture capital and traditional market-making business.

It allows the platform to secure support from top players without diluting too much equity while enabling Jump to leverage potential valuation upside with minimal cash costs.

3. Is Market-Making a Good Business?

Providing market-making services for prediction markets is a worthwhile opportunity for top quantitative institutions at the current stage, but it is far from easy or guaranteed profit; it resembles a high-potential, high-risk strategic investment rather than a daily cash cow business.

This is because the profit path for prediction markets seems clear, yet the reality of operation is full of challenges.

On the positive side, market makers can earn spreads through continuous order placement, cash or USDC incentives provided by the platform, cross-platform arbitrage, and profits from common structural mispricing in event contracts.

These sources of alpha are becoming increasingly scarce in mature financial markets but remain relatively abundant in prediction markets, especially during the retail-dominated phase, where marginal returns can sometimes reach high levels.

Some industry perspectives suggest that the risk-adjusted returns of such asset classes may outperform traditional high-frequency or options trading.

However, as mentioned earlier, the liquidity of prediction events is highly fragmented.

Market makers must provide two-sided quotes around the clock, but there is almost no profit during idle times, and during peak times, they are competing with more algorithms and professional traders.

Some observations indicate that market-making profit margins have decreased from the common 4-5% in sports entertainment events to around 2%.

Additionally, sudden news, black swans, or information asymmetry can instantly lead to directional losses in inventory, while the characteristics of contract expiration settlement leave very limited hedging tools; regulatory uncertainties further amplify the difficulties, such as Kalshi's sports contracts still being under state-level legal disputes, and Polymarket's U.S. operations facing compliance pressures for restart.

However, for Jump Trading, it possesses low-latency infrastructure, cross-asset risk models, and strong capital, enabling it to efficiently capture spreads and arbitrage.

More importantly, the equity value of Kalshi or Polymarket is likely to have upward potential, which is essentially a way to leverage high-growth sectors with low cash costs.

For small to medium-sized or independent market makers, the situation is much more difficult. Not only is the infrastructure threshold extremely high and the learning curve steep, but they are also easily squeezed on spreads by larger institutions.

Overall, this business is highly concentrated among a few top players, making it difficult for retail or small teams to get a share.

Conclusion

Currently, market-making services are still in a phase where "layout exceeds immediate returns." The entry of Jump Trading is a testament to this judgment: top institutions are willing to invest heavily in teams and resources because they see long-term structural opportunities in prediction markets as an emerging asset class.