Liquidity

Liquidity determines the real cost of entering and exiting a Position. On a liquid market, a trader buying 500 YES shares on Kalshi might pay 62.0 cents when the midpoint is 61.5 cents, incurring half a cent of Slippage plus Trading Fees. On an illiquid market, the same trade could sweep the Order Book through several price levels, resulting in an average fill of 64 cents. That 2.5-cent difference compounds into a meaningful edge erosion over many trades. Evaluating liquidity before trading requires checking the Bid-Ask Spread, the volume available within a few cents of the midpoint in the Depth of Market panel, and recent Trading Volume as a proxy for active participation.

Prediction market liquidity comes from two primary sources: active traders placing Limit Order resting orders on both sides of the book, and dedicated Liquidity Provider programs that incentivize continuous two-sided quoting. Polymarket runs a maker rebates program that redistributes a share of taker fees to accounts maintaining resting orders, encouraging tight spreads. Kalshi similarly charges lower fees to Maker and Taker makers who add quotes. Automated Market Maker mechanisms provide a liquidity floor by ensuring a price always exists, but AMM-sourced liquidity can be thin and expensive for large orders. The healthiest markets combine both: an AMM baseline plus competitive human market makers who tighten spreads through rivalry.