Why Market Microstructure Matters for Prediction Market Trading Bots

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Prediction markets like Polymarket appear straightforward, but building an effective automated trading bot requires understanding market microstructure beyond simple probability estimates. Key concepts such as bid-ask spread, liquidity, order flow, slippage, and market impact can significantly erode a theoretical trading edge before a position is even executed. For instance, a perceived 6% probability edge can shrink sharply once spread, slippage, fees, and market impact costs are factored in. Order flow imbalance — comparing aggressive buying versus selling volume — can offer additional signals about short-term market conditions. Ultimately, a robust trading bot must evaluate not just whether a market is mispriced, but whether that mispricing can be profitably captured after all real execution costs are accounted for.

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