Polymarket ends trading loophole for bitcoin quants

After Polymarket quietly ended a substantial penalty on liquidity-removing ‘taker’ orders, quantitative traders (quants) lamented an end to their gravy train. For highly sophisticated market makers, that 500-millisecond quote-adjustment period granted them a superpower over slower traders.

Unfortunately for them, Polymarket has ended its time incentive.

Unsurprisingly, the money spigot used to flow from Polymarket and Kalshi advertising short-term binary options on the price of bitcoin (BTC) to everyday speculators.

Read more: Maduro Polymarket bet raises insider trading concerns

The exchanges feature 5 and 15 minute betting markets on the price of bitcoin (BTC). On their respective homepages, they place those markets in their top three spots on their homepage, and those markets have earned substantial media coverage.

These so-called prediction markets resolve on pricing data from Chainlink and carry high risk for anyone but the most sophisticated traders. One of those risks buried in technical documentation was the ability for market makers to make these adjustments to their quotes, helping ensure they received the most advantageous price.

Rewarding makers to lure money from Polymarket takers

According to several market observers, Polymarket has quietly eliminated its 500-millisecond (half-second) taker price delay.

Makers use limit orders that do not immediately execute, such as a bid price below the current ask price. Takers, in contrast, use market orders or immediately executable limit orders, such as a limit buy order with a price higher than the current ask. 

In a traditional ‘level 2’ or Depth of Market (DOM) quote, makers are listed above and below the last price of an asset. Makers’ limit buy and sell orders, which cannot immediately execute against other orders, remain in pending status, ranked by price. 

Takers, in contrast, whose orders always execute immediately using a standing order from a maker, create each market-clearing price.

Historically, exchanges have rewarded makers with various discounts to encourage their participation. Trading venues with consistently deep or ‘liquid’ DOM quotes across their trading pairs earn more business from traders who are concerned about the ability to easily enter and exit positions with minimal slippage.

Although penalties for takers and rewards for makers vary by exchange, Polymarket has a history of penalizing takers with a 500-millisecond price delay.

Quants never needed speed bumps

However, some traders detected its sudden, quiet removal this month. “Rumor has it the speed bump on crypto markets is GONE. No announcement, no changelog, nothing,” wrote one observer.

For quants and arbitrageurs, trades in Polymarket’s 5-minute games just got 500 ms faster. Those trades can also be hedged using Kalshi’s 15-minute binary options or hundreds of other BTC proxies.

For context, there were only 600 maximum taker transactions within five-minute increments. Now, the number of possible trading combinations seems to have exploded into the thousands or millions – bounded only by speeds of connectivity and computation.

“With the speed bump gone, latency is now the only moat,” someone noted.

Latency is, of course, a double-edged sword. The most advanced, colocated arbitrageurs with the quickest refresh rate on their quotes relative to the price of BTC on Chainlink oracles or even other exchanges can now enjoy amateur order flow from slower competitors.

Many other traders agreed with the implications. 

“Was basically free money before,” observed one trader about the substantial, half-second incentive for makers to leisurely update their quotes with relative ease in computer time. “They did it to invite makers. Now makers are there, they take it away, but still give fee rebate.”

He forecasted another change in the future as a sunset of all incentive programs for Polymarket quant makers. “Next thing fee rebate is gone, and we pay for maker orders as well.”

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