Prediction Market Trading Mechanics Glossary

Prediction market trading mechanics describe how an event contract is priced, how an order executes and what happens when the outcome is resolved. The main distinction is between the number shown on a market page and the price available for the quantity you want to trade.

This glossary connects those steps. Start with the contract and payout, identify the pricing mechanism, inspect the spread and depth, and then calculate the cost of execution. A probability-looking number is only one part of that process. Platform documentation and research references were checked on November 9, 2026.

Start with the contract, not the percentage

An event contract defines an outcome, a deadline and the source or process used to resolve it. In the simple binary examples here, a winning contract pays $1 and a losing contract pays zero. Read the actual rules before applying that model to another product.

Resolution is the process that determines the contract's outcome. Settlement is the resulting handling of the position and payout. The same news story can matter to several contracts while satisfying only one contract's particular conditions. Polymarket's resolution explanation describes why predefined rules matter.

Implied probability is the probability-like interpretation of a price under the assumed payout. It is not a poll of everyone who follows the event, nor a guarantee that the event will occur. Our implied probability guide covers that calculation in more detail.

CLOB, bids, asks and matching

A central limit order book, abbreviated CLOB, collects orders at specified prices and quantities. A bid is an offer to buy; an ask is an offer to sell. The best bid is the highest available buying price, and the best ask is the lowest available selling price.

The bid-ask spread is the difference between them. If the bid is $0.48 and the ask is $0.52, the spread is $0.04. Their midpoint is $0.50, but that midpoint is not automatically an executable offer.

Order matching pairs compatible orders under the venue's rules. Price priority and queue position can affect execution. Do not assume every system uses the same priority rules simply because both show an order book.

A maker supplies resting liquidity. A taker executes against liquidity already available. A limit order can take liquidity if its price crosses an existing quote; “limit order” does not always mean “maker.” A limit sets an acceptable price, while execution still depends on available counterparties and the selected order instructions.

Kalshi's order-book guide explains resting orders and the display of bids and asks. A displayed quantity is a snapshot: it can change before an order reaches the market.

Depth, volume, open interest and order flow

Market depth is the quantity available across price levels. Inspect the side relevant to your intended action. Buying YES requires available selling interest in YES, whether the interface shows it directly or represents the complementary side.

Volume measures trading during a stated interval. Open interest measures outstanding positions under the venue's definition. Neither is the same as the quantity currently offered at the best price. A busy market can still have little available depth at a particular moment.

Order flow is the arrival of orders and related trading activity over time. It can help describe a move, but a sequence of buys does not by itself prove that traders obtained new information. Size, cancellations, timing and changes to both sides of the book provide context.

Liquidity is the ability to transact in a chosen size without excessive cost or price movement. It is more useful to ask “what can 100 contracts execute at now?” than to label an entire market liquid without specifying size and time.

One order-book example

Consider a hypothetical YES book with a $0.48 best bid. Available asks are 40 contracts at $0.52 and another 60 at $0.54. A buyer who can consume both levels would pay:

The displayed midpoint of the best quotes was $0.50. Buying 100 at that midpoint would have cost $50, but the example contains no such offer. Actual execution across the stated asks costs $3.20 more before fees.

The average also exceeds the initial best ask by $0.012 per contract. State the benchmark when discussing slippage, the difference between an expected or reference price and execution. Consuming additional levels is price impact; intervening quote changes can create another difference. Fees are a separate charge.

These are invented quotes for explaining arithmetic, not a current order book, a tariff or a trading recommendation. A real order might fill partly or not at all if the book changes or its limit prevents execution at the second level.

AMM, LMSR and the cost function

An automated market maker, or AMM, uses an algorithm to quote or price trades. The term covers different designs; it does not identify one universal formula.

The logarithmic market scoring rule, or LMSR, is one research-based mechanism associated with Robin Hanson's market-scoring-rule framework. In its cost-based form, a trade changes the market state and the trader pays the difference in the cost function. The liquidity parameter controls price sensitivity within that model.

A cost function is the mathematical schedule used to calculate that state change. It is not a platform's fee schedule. Our worked cost-function guide calculates the difference between the initial marginal price, average purchase price and final marginal price.

LS-LMSR refers to a liquidity-sensitive variant, rather than another spelling of fixed-liquidity LMSR. The Othman, Pennock, Reeves and Sandholm paper studies a mechanism that adapts its responsiveness to trading activity. Its assumptions and properties must be checked separately before reusing a formula from standard LMSR.

Pools, CFMMs, hybrid designs and support for liquidity

A liquidity pool holds assets used by a trading mechanism. A constant function market maker, or CFMM, uses an invariant relating pool reserves. The familiar constant-product example uses x × y = k; Uniswap's pool documentation explains that model. It should not be treated as the formula behind every event market.

A hybrid design combines mechanisms, such as an order book and algorithmic quotes. Inspect the particular implementation to understand where an order goes and which liquidity it can access.

Liquidity bootstrapping means providing initial support for a new market. Subsidized liquidity involves operator funding or incentives supporting participation. Neither proves that execution will remain equally attractive after the support ends.

Virtual liquidity describes depth implied by a pricing model rather than a complete ladder of resting orders. It does not mean unlimited capacity. The cost of a chosen quantity still needs to be calculated under the mechanism's assumptions.

Price discovery and a practical reading sequence

Price discovery is the formation of prices through market activity. It does not automatically separate accurate information from mistakes or manipulation. A move in price is an observation whose cause and forecasting value need further evidence. The price discovery guide shows how to read that evidence.

Use this sequence on a market page: identify the outcome and payout; establish what the displayed number represents; inspect executable prices and depth; calculate quantity, costs and maximum loss; then check resolution rules and eligibility before using the service. The fee comparison covers costs separately from the trading mechanism.

Knowing the terms helps you ask a precise question. It does not establish that a price is correct or that a trade will be profitable. Keep the event forecast, the execution calculation and the settlement record as distinct parts of the analysis.