Why Susquehanna Is Building a Prediction Market Business | Odd Lots

Susquehanna International Group is discussing its market-making business with Kalshi and how prediction markets could scale to larger institutional investors such as hedge funds. The key issue is liquidity: many contracts remain shallow and illiquid, so the article focuses on hedging, trading flows, and how market makers generate returns. The piece is informative rather than event-driven and is unlikely to have an immediate price impact.

Analysis

Prediction markets only become investable for larger pools when the microstructure stops being the product. The key second-order effect is that market makers like Susquehanna can compress spreads and smooth fills enough to turn event contracts from novelty instruments into usable hedges, which should gradually shift volume away from discretionary betting flows toward portfolio-level risk transfer. That matters because the first wave of institutional adoption is likely not outright speculation, but low-notional hedging of macro, policy, and event risk where traditional options are too expensive or poorly matched.

The likely winner is the venue and any market-maker with balance-sheet depth; the loser is any smaller platform unable to warehouse inventory or source two-sided flow. If liquidity improves, contract pricing will also become a sharper real-time sentiment signal, which could indirectly pressure volatility sellers and event-driven equity desks that rely on slower information diffusion. The bigger structural opportunity is data: cleaner prediction-market prices may become a differentiated alternative input for macro and political risk models, creating spillover demand for adjacent data/analytics businesses even if contract volumes remain modest.

The main risk is that institutional participation stays capped by legal, compliance, and model-risk frictions; that would keep the market in a retail-dominated equilibrium with episodic liquidity and mean-reverting spreads. A second-order tail risk is that a few large hedges crowd the same outcome and create unstable jumps around catalysts, which could scare away the very allocators needed for scale. Time horizon matters: near term this is a microstructure story, but over 6-24 months the question is whether prediction markets become a real competing venue for event risk or remain a niche side pocket.

Key Decisions for Investors

• Long the liquidity providers / venue complex on dips: prefer firms with proven market-making and exchange economics exposure if accessible; thesis is 6-12 month spread compression and volume normalization. Risk/reward improves only if institutional adoption broadens, so size as a call on adoption rather than current revenue.
• Pair trade: short small, retail-heavy prediction-market proxies against long a diversified market-maker with balance-sheet scale. The trade expresses the view that scale and hedging sophistication, not brand, will capture the economics over the next 3-9 months.
• Use prediction-market prices as an overlay signal for event-driven equity books; for example, tighten risk around names with binary policy exposure when contract-implied probabilities move sharply in the last 1-2 weeks before catalysts. This is a process trade, not a P&L bet, but it can reduce tail losses materially.
• Do not chase the narrative into vol sellers indiscriminately; if prediction markets gain legitimacy, they may steepen intraday volatility around catalysts. Favor optionality or defined-risk structures over naked short-vol for the next 1-2 quarters.
• Watch for a data-provider beneficiary trade if contract-level odds begin to be licensed into professional terminals; that could create a 12-24 month secondary winner even if the core market remains small.