Trading Firms Making Kalshi & Polymarket Real Markets

The Rise of Specialized Trading Firms on Prediction Markets

Kalshi's volume on its most active political and economic contracts now regularly clears eight figures in notional value on single-event days, a threshold that would have been unthinkable when the CFTC first granted the exchange its designated contract market license in 2020. Polymarket, operating offshore but increasingly courted by U.S. participants, has posted cumulative volume figures in the tens of billions since its founding. These headline numbers obscure a structural shift that market microstructure analysts have watched accelerate over the past eighteen months: the migration of professional liquidity provision from ad hoc participants to dedicated prediction market trading firms.

The Wall Street Journal reported on October 3, 2026, that these upstart firms now loom large on platforms such as Kalshi and Polymarket, and that they are beginning to raise capital. That capital raise is the tell. Firms that once operated as informal partnerships of quantitative traders arbitraging mispriced event contracts are now incorporating, hiring, and pursuing institutional backing. The emergence of a distinct cohort of prediction market trading firms marks the transition of these platforms from novelty venues with thin order books to markets where serious capital can be deployed and withdrawn at scale.

The distinction matters because prediction markets occupy a strange regulatory and economic space. They are, at their core, binary options on real-world outcomes. A contract on whether the Federal Reserve cuts rates at a given meeting, or whether a specific bill passes, or whether a candidate wins a primary, settles at $1 or $0. The mechanics are simple. The microstructure problem is not. Wide spreads, episodic volume, and event-driven settlement cycles create inventory risk that few traditional market makers are equipped to manage. That gap is precisely what these specialized firms have filled.

Who Are the Upstart Firms Dominating Prediction Market Volume

The firms in question are not household names. They are small, technically sophisticated operations, often founded by former proprietary traders, quantitative hedge fund alumni, or engineers who cut their teeth on crypto exchange market making. The Journal's reporting identifies them as upstart trading firms that have grown large relative to the platforms they trade on, meaning their individual order flow now constitutes a meaningful share of total volume on specific contracts.

This concentration is a double-edged sword. On one hand, dedicated market makers bring tighter quotes and deeper books. On the other, platform dependence on a handful of firms introduces the same fragility that equity markets experienced during the 2010 Flash Crash and the 2020 Treasury market turmoil, when a small number of principal trading firms withdrew simultaneously and liquidity evaporated.

The firms' strategies vary. Some run continuous two-sided quotes on high-volume political contracts, capturing the spread and managing delta exposure to correlated events. Others take directional positions, effectively running event-driven hedge fund strategies through prediction market instruments. A third category focuses on cross-platform arbitrage, exploiting price discrepancies between Kalshi, Polymarket, and offshore venues that list functionally identical contracts. Each strategy requires different infrastructure, different risk limits, and different relationships with the platforms themselves.

Why Liquidity Providers Are Essential to Prediction Market Credibility

Bid-ask spreads are the clearest signal of liquidity depth in any market. On Kalshi's most liquid contracts, such as Fed funds rate decisions or major election outcomes, spreads have compressed from several cents to as little as one or two cents during peak hours. On thinner contracts, spreads of five to ten cents remain common, and open interest may sit in the low thousands of dollars. That divergence tells you everything about where professional market making has taken hold and where it has not.

Academic work on prediction market microstructure has long emphasized the relationship between liquidity provision and price accuracy. Research out of the University of Chicago's Booth School and the California Institute of Technology has shown that prediction markets with active market makers produce more accurate probability estimates than those relying solely on speculative participants. The mechanism is straightforward: market makers are compensated for absorbing inventory risk, and their quoting behavior responds to information asymmetries. When they step back, prices become noisier and less informative.

CFTC comment letters on event contracts have repeatedly flagged this dynamic. Industry participants have argued that robust market maker participation is a prerequisite for these contracts to serve their purported function as hedging and forecasting tools. Without it, prediction markets devolve into thinly traded curiosities, useful for entertainment but unreliable for risk transfer.

The Capital-Raising Push: Scaling Up for a Maturing Market

The Journal's reporting that these firms are starting to raise capital signals a maturation phase. Raising outside capital introduces new dynamics. Investors will demand audited performance, formal risk management, and diversification beyond the concentrated event risk that defines prediction markets. That pressure could push firms to expand across more contracts, more platforms, and potentially into adjacent markets such as sports betting derivatives or macroeconomic event contracts.

The timing is notable. Regulatory clarity around event contracts has improved incrementally since the CFTC's 2024 rulemaking on the scope of permissible contracts, though legal challenges continue. Kalshi's successful litigation against the CFTC over congressional control contracts, decided in the exchange's favor in late 2024, opened the door for a broader set of listed event contracts. Polymarket's settlement with the CFTC and its subsequent moves toward U.S. re-entry have further legitimized the sector.

Capital formation in this niche remains modest by hedge fund standards. These are not Citadel or Jane Street. But the trajectory matters. A trading firm that raised a $5 million seed round in 2025 to quote on Kalshi contracts might be seeking $25 million or more in 2026, with institutional limited partners ranging from family offices to crypto-native venture funds. The sums are small. The implications are not.

Implications for Retail Traders and the Broader Financial Ecosystem

For retail traders on Kalshi and Polymarket, the rise of professional market makers is a net positive in the short run. Tighter spreads reduce transaction costs. Deeper books mean larger orders can be filled without moving prices dramatically. The experience of trading a prediction market contract begins to resemble trading a liquid ETF, at least on the most popular expirations.

The longer-run picture is more complicated. Professional liquidity provision tends to reduce the edge available to retail participants. When a market maker with superior infrastructure, faster data feeds, and more sophisticated models is on the other side of every trade, retail traders face the same disadvantage they face in equity options or futures. That is not inherently unfair, but it changes the character of the platform.

Broader financial ecosystem participants should also take note. Insurance companies, corporate treasuries, and asset managers have begun exploring event contracts as hedging tools for political, regulatory, and macroeconomic risk that traditional derivatives cannot easily address. A portfolio manager wanting to hedge exposure to a specific legislative outcome, for instance, has few instruments available. Prediction market contracts could fill that gap, but only if liquidity is sufficient to absorb institutional-sized positions. The capital-raising push by trading firms is a necessary step toward that end.

What Comes Next for Prediction Market Infrastructure

Infrastructure is the next battleground. Prediction market trading firms need low-latency execution, reliable APIs, and clearing mechanisms that can handle settlement across diverse event types. Kalshi's centralized clearing model and Polymarket's move toward a U.S.-regulated structure will shape how firms build. The platforms that invest in market maker programs, including rebate structures, dedicated API access, and risk management tools, will attract the most sophisticated firms.

The parallel with early electronic futures markets is instructive. When the Chicago Mercantile Exchange opened its Globex electronic platform in the early 1990s, a handful of specialized firms built the algorithmic infrastructure that made electronic futures viable. Those firms, including what became Getco and later KCG, grew into major market structure players. Prediction markets may be at a similar inflection point.

The Journal's reporting underscores that these trading firms are no longer peripheral. They are the liquidity engine of a market segment that is scaling rapidly. Whether they become durable institutions or a transient phase in the platform evolution depends on regulatory stability, platform incentives, and the firms' own ability to manage the unique risks of event-driven binary instruments. For now, they are the difference between a prediction market that quotes a number and a prediction market that trades like a real market.

Source: WSJ.com: Markets