Is there really a pricing revolution within prediction markets?

Sebastien Sabic, Co-Founder and CSO at Moon Intelligence, explores why prediction platforms need to shift their focus to combatting pricing inefficiencies, or risk being left behind by traditional sportsbooks.

The rise of prediction markets has been heralded as the ultimate democratiser of information. The narrative is simple: by allowing retail participants to trade on outcomes, we create a more accurate, decentralised ‘wisdom of the crowd’ environment reminiscent of the early exchange model.

However, a closer look at the infrastructure of these markets suggests that the pricing is not as revolutionary as it seems. In practice, prediction markets are often just a mirror reflecting the same sharp bookmaking giants, market makers, and institutions that have dominated the landscape for decades.

It is a common belief that retail activity on prediction markets is a new force in price movement. While retail volume absolutely impacts pricing, this is not a new phenomenon. Sharp bookmakers have always adjusted their lines based on retail flow. The difference is that prediction markets make this tug of war visible on a public ledger.

While the bets placed by retail users on prediction markets can impact pricing substantially, they do not necessarily do so more than in the realm of traditional sportsbooks. The engine has moved to a new chassis, but the horsepower remains roughly the same.

There is a persistent misconception among peers, which is the idea that on a prediction market, individuals are simply betting against another retail user in a vacuum. This suggests that predictions are a separate market from bookmakers.

In reality, the two are inextricably linked. Market makers on prediction markets typically derive their pricing directly from sharp bookmaker feeds. In many cases, the market makers providing liquidity on a prediction market are the exact same institutions running the sharp books. If the price moves at a major Asian bookmaker, the prediction market price will follow in milliseconds, regardless of what the ‘wisdom of the crowd’ thinks.

If Prediction Markets are just following sharp books, why do they often look like they have better pricing? It comes down to the market maker’s mandate.

On a traditional platform, a bookmaker can rely on its brand notoriety, significant player base, or slick UI to attract volume, allowing them to bake in a higher margin, or vig. Within predictions, market makers are forced to compete on price alone to capture volume.

When comparing a major prediction market to an individual sharp book, the prediction platform often wins simply because it forces market makers to offer their best price to stay relevant in a transparent environment.

Sometimes, prediction market pricing does become uncorrelated from the sharp books. However, this is rarely due to superior wisdom. Instead, it is usually driven by friction.

If high fees make a prediction market less efficient, the only people left on the site are users who are not price sensitive. This often happens when a prediction market is internally funnelled. For example, a user on a financial brokerage app might see a prediction market as a fun add-on, much like a gamification widget on a casino or sportsbook, and bet there despite better odds available on other books, simply because the money is already in their account. This creates a small environment where pricing does not reflect the global reality.

Outside of a better price, the product lacks the depth of an established bookmaker. Typically, this extends to parlays, and same game offerings, which have quickly become the lifeblood of recreational betting, as well as prop bets, niche markets on popular sports, and of course, the user experience. Sportsbooks have spent an enormous sum on gamifying the betting experience, ensuring the process is enjoyable, easy, and engaging. Prediction markets lack a lot of this investment, offering a stripped-back product.

Without a pricing edge, net of fees it will be very hard for prediction markets to compete with bookmakers as the product and marketing will never be on par.