Limits to Arbitrage and Prediction Market Efficiency: the Case of PredictIt

PredictIt is a CFTC-regulated US prediction market focused on political outcomes. It was very successful in attracting participants in the 2016-22 period, running liquid markets on topics predecessors had tried unsuccesfully. During this period, investors were limited to $850 positions in each contract, which limited arbitrage trading. PredictIt exhibited much larger pricing biases than previously studied prediction markets. Bid prices often persistently added to more than 110, implying an immediate arbitrage profit even after fees. Prices exhibited an overpricing of longshots that was larger than in other prediction markets. The experience of PredictIt suggests that limiting stakes may undermine the ability of prediction markets to accurately price event probabilities.