Prediction market glossary.

Adverse selection

The tendency for a market maker's fills to come disproportionately from better-informed traders. In event markets it concentrates around scheduled releases and breaking news, and it is the main reason spreads exist.

Ask (offer)

The lowest price at which someone is willing to sell a contract. Buying immediately means paying the ask.

Basis

The difference in price between two contracts that reference the same or related events, often caused by differences in rules, fees, collateral or timing rather than by mispricing.

Basis risk

The risk that two apparently equivalent contracts settle differently. See cross-venue arbitrage.

Bid

The highest price at which someone is willing to buy a contract. Selling immediately means hitting the bid.

Binary option

An instrument that pays a fixed amount if a condition is met and nothing otherwise. Event contracts are economically cash-or-nothing binary options on an outcome.

Brier score

The mean squared error between probability forecasts and 0/1 outcomes. Lower is better; always forecasting 50% scores 0.25. See calibration.

Calibration

The property that events forecast at X% happen about X% of the time. Measured with reliability diagrams and the reliability term of the Brier decomposition.

Carry

The cost (or benefit) of holding a position until resolution, chiefly the opportunity cost of locked collateral, net of any interest paid by the venue.

Central limit order book (CLOB)

A matching system where all buy and sell orders are collected and matched by price and time priority. Most major event venues use one, on- or off-chain.

Collateral

The funds locked to back a position. Buying Yes at 63¢ requires 63¢ of collateral; selling Yes at 63¢ (equivalently, buying No at 37¢) requires 37¢.

Contract ladder

A series of contracts on the same quantity at different strikes (e.g. CPI ≥ 2.8%, ≥ 2.9%, ≥ 3.0%). Prices across a ladder imply a full probability distribution.

Designated market maker

A firm with an agreement with a venue to quote two-sided markets under agreed obligations (spread, size, uptime), often in exchange for fee benefits.

Depth

The quantity available at and near the best bid and ask. Displayed spread without depth is a weak signal of liquidity.

Dispute window

In oracle-resolved markets, a period during which a proposed outcome can be challenged before it becomes final.

Event contract

A contract whose payoff depends on whether a specified event occurs, typically paying $1 for Yes and $0 for No.

Expected value (EV)

Probability-weighted average payoff. Buying Yes at price P when the true probability is p has an EV of p − P per contract before fees.

Fair value

A market maker's best estimate of a contract's true worth: its probability adjusted for carry, fees and resolution risk.

Favourite-longshot bias

The empirical tendency for low-probability outcomes to be overpriced and high-probability outcomes underpriced in betting and prediction markets.

Fill

An executed trade. A partial fill executes only part of an order's size.

Hedge

A position taken to offset risk in another position, for example buying a correlated contract to reduce exposure to a single outcome.

Implied probability

The probability implied by a contract's price, usually the mid or microprice divided by the payout.

Inventory

A market maker's net position in a contract or theme. Managing inventory is the central risk problem of market making.

Jump risk

The risk of a sudden, discontinuous price change, typically when information is released. Event contracts are dominated by jump risk near scheduled events.

Kill switch

An automated or manual control that immediately cancels all orders and halts trading in response to a fault or risk breach.

Latency

The delay between information becoming available and a trading system acting on it. Crucial for scheduled releases; less so for ambiguous news.

Limit order

An order to buy or sell at a specified price or better. Resting limit orders provide liquidity.

Liquidity

The ability to trade meaningful size quickly at a price close to fair value. Spread, depth and resilience are its three dimensions.

Liquidity rewards

Payments some venues make to participants who rest orders near the midpoint, to encourage tighter, deeper books.

Log loss

A proper scoring rule, −[o·ln f + (1−o)·ln(1−f)], that heavily penalises confident wrong forecasts.

Maker / taker

A maker adds a resting order to the book; a taker trades against one. Venues often charge them different fees.

Mark-out

The change in fair value in the seconds or minutes after a fill, used to measure how informed the counterparty was.

Microprice

A size-weighted midpoint that leans toward the side with less resting size, giving a better short-term fair-value estimate than the simple mid.

Midpoint (mid)

The average of the best bid and best ask.

Nowcast

A model estimate of a current or very recent quantity (e.g. this month's inflation) before official data are published.

Optimistic oracle

A resolution mechanism in which an outcome is proposed and accepted unless disputed within a window, with disputes escalated to a vote.

Order book

The list of resting buy and sell orders at each price for a contract.

Overround (vig)

In bookmaking, the amount by which implied probabilities across all outcomes sum to more than 100%. In exchange markets the bid-ask spread plays the equivalent role.

Payout

The amount a winning contract pays at resolution, typically $1 (100¢).

Position limit

A maximum allowable position in a contract, set by the venue, a regulator or the firm's own risk policy.

Prediction market

A market where participants trade contracts whose payoffs depend on future events, so that prices can be read as probabilities.

Proper scoring rule

A scoring rule under which a forecaster's expected score is optimised by reporting their true belief. Brier and log loss are both proper.

Quote

A simultaneous bid and offer posted by a market maker.

Reliability diagram

A plot of observed frequency against forecast probability in bins; perfect calibration lies on the diagonal.

Resolution

The determination of a contract's outcome according to its rules, after which it pays 100¢ or 0¢.

Resolution source

The named source (an agency, an official result, a data provider) a contract's rules use to determine the outcome.

Scalar contract

A contract whose payout varies with a numeric outcome within a range, rather than being all-or-nothing.

Self-trade prevention

Controls that prevent a firm's own orders from trading with each other.

Settlement

The transfer of funds after resolution: winning contracts pay out and collateral is released.

Skew

Shifting both bid and ask in the same direction to manage inventory: down when long, up when short.

Slippage

The difference between the expected price of a trade and the price actually achieved, typically from thin depth or fast-moving markets.

Spread

The difference between the best ask and the best bid. The market maker's gross compensation for providing liquidity.

Strike

The threshold in a contract on a continuous quantity, e.g. the 3.0% in “CPI ≥ 3.0%”.

Theme

A group of contracts sharing a common driver (a meeting, an election, a storm) whose exposures are aggregated for risk purposes.

Tick size

The minimum price increment, often 1¢ in event markets; some venues allow finer ticks near the tails.

Time to resolution

The time remaining until a contract's outcome is determined; it drives both carry and the amount of information still to arrive.

Yes / No shares

The two sides of a binary event contract. A Yes and a No share together are always worth exactly the payout at resolution.

---

Questions