The House Always Wins, Even on House-less Kalshi

“In casinos, the house always wins. With Kalshi, there is no house. We don’t win when our customers lose,” the nation’s leading prediction market states on its FAQ page, differentiating itself from traditional sports betting. According to its proponents, prediction markets operate on a “peer-to-peer” structure where, instead of a house, the “counterparty” on a bet is another regular person, just like you or me. “Unlike sportsbooks Kalshi doesn’t set the odds, other users do,” claims an ad spot currently playing across television and digital platforms, featuring the world’s longest sandwich.

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These other “users” are known as market makers, a common feature of financial markets, who continuously quote prices for everyone else to ensure consistent liquidity and smooth trading. But contrary to what the advertisement implies, most market makers are not ordinary people but highly advanced trading institutions. When Kalshi claims there is no house, critics are quick to point out that the company, like many prediction markets, has its own affiliate market maker, Kalshi Trading, which does, in fact, win when the customers on the other side of their bets lose.

Kalshi Trading has received the most attention for its house-like attributes, but the company also aggressively pursues outside market makers in the form of quantitative trading firms, hedge funds, and similarly sophisticated and well-equipped institutions that provide liquidity in their markets. In exchange, the firms receive a suite of exclusive perks to further boost their odds, on top of the structural advantages already built into institutional trading operations.

So instead of a fair marketplace without a house—as Kalshi repeatedly claims in marketing campaigns and legal documents—users face what a class action lawsuit filed in Oregon against the company and its high-profile outside market maker Susquehanna International Group called “a ‘banked house,’ indistinguishable from a traditional sportsbook.”

Here’s one big difference: Where gamblers in a casino are fully aware who’s taking their money, prediction market users are unknowingly losing out to large Wall Street firms and other powerful profit-seeking enterprises.

KALSHI, WHICH CURRENTLY HOLDS CLAIM to over 80 percent of weekly prediction market trading volume, points out that many financial markets—including the stock market and other commodity derivatives markets under their same regulatory structure—use market makers to maintain liquidity. Still, the market making on prediction markets much more closely resembles bookmaking in a casino in virtually every aspect but the name.

In sportsbooks and casinos, bets are placed against an in-house operation that sets the odds with a built-in fee, called a “vigorish,” or “vig.” In setting the odds this way, the house has an edge over the gambler, and profits off every wager. In many ways, the vig is just a juiced-up version of the “spread” between buy and sell prices traditional market makers take as a payment for providing liquidity. In prediction markets, not only is this spread often far greater than that of the other markets Kalshi compares itself to, but prediction market makers also make money by taking an affirmative position in certain markets and actively trading against counterparties, behavior that is more commonly found among casino bookies than traditional market makers.

Kalshi also takes its own vig-like fee, which is often shared with market makers through “discounts on fees, rebates on fees, revenue share from fees, and other monetary benefits,” according to the membership agreement.

These fee benefits serve to further funnel money from Kalshi’s customers to their partners, on top of the structural advantage they already have as professional trading operations, like their advanced computing power and modeling software. One study on Kalshi data found what could be described as a systematic wealth transfer. Market “takers”—or traders who bet on various markets—lost an average of 1.12 percent on every trade. But market makers gained an average 1.12 percent. Importantly, this pattern was reversed in the early days of Kalshi trading, when the platform did not have institutional liquidity providers.

Another analysis of Kalshi data from the Roosevelt Institute found that market takers lost a total of $584 million between Kalshi’s launch in July 2021 and mid-May of this year. “There was a flow of money from takers to makers. The losses that takers have experienced on Kalshi go to the makers,” said Toyosi Odusola, one of the researchers on the project.

Another report from Sportico found that retail users lost $117 million from January through April to market makers on Kalshi “combos,” which is just another name for the multi-leg parlays offered on sportsbooks, where users can group several bets together to increase their payout if all of the bets hit. Shortly after, Kalshi’s data partner Dune took down the data used to create these reports, and then put it behind a $40,000 paywall.

This is another way market-making institutions have an advantage over regular people. Data application programming interfaces (APIs) give sophisticated traders advanced data feeds that include either special information unavailable to everyone else or faster access to real-world information that can be vitally important in markets like Kalshi that are constantly traded.

The latter example may sound familiar. Trump Media’s Truth API gives its customers an instant stream of Truth Social’s potentially market-moving posts—such as a Trump post about the war in Iran that may have major implications for Kalshi’s market about the Strait of Hormuz, for example—for the low low price of $100,000 a month. When asked about Truth API specifically in a podcast interview, CEO and co-founder Tarek Mansour said, “I don’t know what that has to do with Kalshi.” He went on to argue that success in Kalshi markets require a holistic understanding of the world, not just faster access to certain information. But markets on his platform are constantly swinging with the drop of a new social media post or other novel information, which those with institutional funding have access to before anyone else.

Mansour’s company also just unveiled a new data system for institutional traders to further streamline their advanced access to data and provide a machine-readable feed of proprietary data on the most actively traded markets, sports and crypto pricing bets.

Another perk for market makers that Kalshi customers can’t access is what the company describes—buried in the membership agreement—as “sophisticated risk management tools, such as order protections whereby orders are canceled if the market maker’s trading session disconnects from the Exchange.” The agreement further goes on to disclose that the “tools may give market makers a trading advantage over members who are not market makers.”

“Prediction markets have marketed themselves as a platform where you’re betting against your peers,” Odusola told the Prospect. “Like, to make me believe that I’m betting against you when, in reality, I might be betting against someone who has institutional knowledge, institutional equipment, institutional funds, who is receiving different fees than I am, who has access to information that I might not have.”

Market makers are better seen as arms of Kalshi than entities at arm’s length. As the Oregon class points out in the complaint, “institutional market makers like Susquehanna are not financially independent of Kalshi. Rather, they are Kalshi’s business partners, contracting directly with Kalshi to ensure continuous wagering on the platform.” To uphold their end of the deal, Kalshi structures its markets “ensuring that the market makers profit at the expense of others.”

IN APRIL 2024, KALSHI INITIATED ITS FIRST market maker partnership with Susquehanna International Group, one of the world’s largest proprietary trading firms. As a leading Wall Street market maker, Susquehanna already brought the kind of sophisticated technological infrastructure and modeling tools that, according to the complaint, give it “a systematic advantage over retail Kalshi users.”

The firm is run by Jeff Yass, who, on top of being the richest man in Pennsylvania and a prolific Republican mega-donor, has spent most of his life embroiled in a well-documented love affair with gambling and sports betting.

Yass got his start in college at the poker table, while skipping class with his buddies to hit the racetrack. While in college, he published a paper in Gambling Times about the econometrics of horse racing. After graduation, Yass and his friends went to Vegas to give professional poker a try. Eventually, the group turned their sights on financial markets and founded Susquehanna, with gambling as a core tenet of the firm’s path to success. Both poker games and trading simulations play an equally important role in the three-month training program for new trading hires.

Long before getting involved with prediction markets, Susquehanna already had a sports gambling shop set up in their offices in Dublin, Ireland (when it opened in 2017, there was hardly any legal sports betting in the United States, let alone sports contracts offered on derivatives markets). The team, led by Yass’s son Doug, used their advanced trading infrastructure to get a leg up in European sports betting exchanges.

Now Susquehanna Predictions employs the same statistical sports betting strategies as a market maker on Kalshi, operating out of the Dublin branch and the firm’s suburban Philadelphia headquarters.

Susquehanna has positioned itself as the leading institutional market maker in prediction markets, acting as the counterparty in a high-profile hedge with a California goat farmer worried his labor costs could spike dramatically if a wage exemption passed by the State Assembly in 2016 for goat farmers expired, for example. Susquehanna and the farmer set up an event contract through Kalshi that will pay out $500,000 to the farmer if the Assembly doesn’t change the law by October 1. It also established a new prediction market in partnership with Robinhood, the trading platform marketed to retail investors. The notoriously private Yass has even made several podcast appearances to wax poetic about the virtues of prediction markets and their incredible predictive power, never once acknowledging the similarities with his favorite pastime, gambling.

Since Kalshi and Susquehanna’s partnership was announced, more and more Wall Street trading firms and hedge funds have jumped in. Some, like Susquehanna and global prop trading firm Jump Trading, are less coy about their role in these markets. But Kalshi and other prediction markets mostly don’t disclose who their market makers are, so the full landscape remains obscured, along with how much these companies are really making off ordinary people using the platforms.

One thing is for sure. Market making in prediction markets is lucrative enough that trading teams across the country and world are continuing to expand their prediction market divisions, populating jobs boards on LinkedIn with prediction market roles, many asking specifically for experience with sports. Jump Trading doubled its prediction market team in July, focusing its hiring efforts on dorm-room sports betting talents alongside experienced Wall Street traders.

AS SUSQUEHANNA’S JOURNEY to the prediction market world exemplifies, sports betting expertise can be a major leg up for market makers in the space. In fact, major sportsbooks, which were only recently pushing back against the growing tide of prediction markets threatening their business, have found a golden opportunity leveraging their bookmaking experience to profit as a market maker for their own newly established markets, as well as providing outside liquidity for other platforms.

FanDuel’s parent company Flutter reported $6 million in prediction market revenue specifically from market making in their second-quarter earnings this year. While their in-house prediction market has had a sluggish start, Flutter is focusing on using their bookmaking operations to profit as a market maker “across prediction market platforms.” The company said they expected to take a total of $50 million in 2026 from the endeavor. “Progress to date has been very quick and profitable,” CFO Rob Coldrake said in an interview shortly after the Q2 earnings release. “We think this is where the majority of the economics will sit within the prediction market ecosystem when you look forward.”

Unlike Kalshi, sportsbook companies that host prediction markets and act as market makers lack the incentive to differentiate themselves from, well, sportsbooks. They are at least honest about the similarities between market making for sports contracts and the bookmaking they do for their core betting operations.

Flutter ties its advantage specifically to the complicated parlay contracts surging on platforms like Kalshi. “We’ve demonstrated our expertise in this area before,” Coldrake said of parlays. “That’s why we’ve got a pricing advantage on the core sportsbook and that carries over [into prediction markets].”

DraftKings, FanDuel’s main competitor, said they are “seeing meaningful traction on the market making side as we leverage our industry-leading Sportsbook modeling and risk management capabilities” in a letter to investors. “We are live on three exchanges and are consistently making markets on both singles and combos at a profit,” the letter continued.

While Kalshi markets themselves as a more retail-friendly alternative to traditional sportsbooks, DraftKings is taking the opposite approach, marketing its own prediction market in states where sports betting is legal not to retail traders but to professional bettors and institutional traders, who they estimate make up 80 to 90 percent of their prediction market volume in those states.

“The thing that worries me is that some of the predictions guys out there are positioning this as peer-to-peer … but it’s really more peer-to-Wall Street, peer-to-professional bettor or peer-to-market maker,” the company’s CEO Jason Robins told Sportico earlier this month.

It may be true that sportsbooks, despite their own destructive qualities, are better for regular users than prediction markets. According to a report which Kalshi originally accused of being “extortion,” retail users lose more in the first three months on its platform than on sportsbooks like DraftKings. The analysis also found that the bottom quartile of users lose an average of 28 cents per dollar gambled, compared to only 11 cents on other gambling sites. Why? Well, the losses could be attributed to the presence of sophisticated institutional traders, according to the report’s author, equity researcher Jordan Bender.

Kalshi and many of its competitors obscure that presence with their aggressively marketed claims of a house-less, peer-to-peer, and completely fair marketplace.