Electronic market makers trading on Kalshi are small fish in a big pond

In traditional financial markets, electronic market makers are juggernauts. Citadel Securities, for example, is involved in 25% of all trades in the US equities market just by itself. In the burgeoning asset class of prediction market event contracts, these firms are much less prominent.

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Speaking on Stripe founder John Collison's Cheeky Pint podcast, Kalshi co-founder Luana Lopes Lara said that only 5% of bid matches on the platform are from "the big institutional market makers you'd think about." The other 95% comes from "over 2,000" smaller market makers, some of which are just individuals.

Kalshi's founders didn't say which institutions are market making on Kalshi. Susquehanna International Group has been a vocal fan of prediction markets, and Jump Trading quietly started making markets on the platform late last year, and has been given an equity stake in the company for its services. Crypto investment bank Galaxy Digital was also reportedly in discussions to start a small market making unit for prediction markets. Other than that, market makers operating on Kalshi are doing so very quietly.

There's likely even less institutional participation on Polymarket, which has had less of an emphasis on regulation as Kalshi. One insider told us the market-making space there is "mostly just a bunch of cowboys." However, Jump Trading is thought to have a similar arrangement with Polymarket as it does with Kalshi.

There are multiple reasons that market makers don't want to join the train. Tarek Mansour, Kalshi co-founder, said on the podcast that "traditional Wall Street market makers are not geared up for" the breadth of markets available on Kalshi; "it's not like they can spin up a new desk to price politics or price culture in an hour." Lopes Lara said that long tail markets like "will One Direction have a reunion" (or Polymarket's famous 'Will Jesus Christ return' market) are particularly hard to price; she said Kalshi "actually [has] to incentivize market makers to come in.” 

Many markets on Kalshi are traditionally taboo for electronic trading firms, particularly sports contracts. Multiple major market makers have had sports trading teams, but it is seen as a 'lesser' market with higher risk that can harm your ability to bring in investors. One major electronic market maker denied having a sports trading team in 2024 despite multiple headhunters telling us the contrary. One of those headhunters said that the success of Kalshi and Polymarket hasn't changed much about their attitudes to sports trading.

While institutions aren't too hot on Kalshi yet, Kalshi is certainly interested in institutional talent. Peter Wagner, managing director at quant recruitment firm Affinity North said that Kalshi is "a new player in the market for elite talent" in his Q1 market report. Lopes Lara said in the podcast that the firm has just 120 employees at the moment but that may soon change.

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