Prediction Market Arbitrage Guide: Strategies for 2026

What Is Prediction Market Arbitrage?

Prediction market arbitrage exploits pricing inefficiencies between binary outcome contracts. When the combined cost of buying both “Yes” and “No” positions totals less than $1.00, traders lock in risk-free profit regardless of the event outcome.

Academic research from IMDEA Networks Institute documented over $40 million in arbitrage profits extracted from Polymarket alone between April 2024 and April 2025. The study analyzed 86 million bets across thousands of markets, revealing that sophisticated traders consistently exploit mispricings that even high-liquidity markets exhibit.

Unlike traditional arbitrage in forex or equities, prediction market arbitrage operates on event outcomes rather than asset prices. You’re not betting on whether Bitcoin rises or falls. You’re betting on whether a specific event happens, and profiting when platforms disagree on the probability.

The fundamental principle is simple: in any binary market, the probability of “Yes” plus the probability of “No” must equal 100%. When they don’t, arbitrage exists.

How Prediction Markets Work

Before diving into arbitrage strategies, you need to understand the mechanics. Prediction markets let traders buy and sell contracts that pay out based on real-world events.

Each contract represents a binary outcome. “Will the Fed cut rates in January?” If the event happens, “Yes” shares pay $1.00. If it doesn’t, “No” shares pay $1.00. Shares trade between $0.01 and $0.99, with prices reflecting the market’s implied probability.

A “Yes” share trading at $0.65 implies a 65% probability the event occurs. A “No” share at $0.35 implies a 35% probability it doesn’t. In a perfectly efficient market, these always sum to $1.00.

But markets aren’t perfectly efficient. Information asymmetry, liquidity fragmentation, and human psychology create temporary mispricings. That’s where arbitrage opportunities emerge.

Key Platforms

Polymarket operates as a decentralized prediction market built on Polygon. It uses USDC for settlement, charges no trading fees (though a 2% fee applies to winning positions), and processes transactions on-chain. Polymarket led with $3.7 billion in volume during the 2024 U.S. election cycle.

Kalshi is the first CFTC-regulated prediction market exchange in the United States. It operates as a Designated Contract Market (DCM), offering legal protection and fiat currency settlement. Kalshi appeals to US traders seeking regulatory clarity, though it charges higher fees (up to 3% taker fee).

Types of Prediction Market Arbitrage

The IMDEA research identified two primary arbitrage categories, each with distinct characteristics and execution requirements.

1. Market Rebalancing Arbitrage (Same-Market)

This occurs within a single market when “Yes” and “No” prices don’t sum to $1.00. It sounds impossible, but it happens regularly.

Consider a market where “Yes” trades at $0.52 and “No” trades at $0.46. The combined cost is $0.98. Buy both positions for $0.98, and you’re guaranteed $1.00 when the market resolves. That’s a 2% risk-free return.

Why does this happen? Order book dynamics, market maker spreads, and delayed price updates create temporary discrepancies. Automated bots scan for these opportunities continuously, which is why they typically last only seconds.

The research found that same-market arbitrage opportunities on Polymarket averaged returns of 0.5% to 2%, with windows often closing within 200 milliseconds.

2. Combinatorial Arbitrage (Cross-Market)

More complex arbitrage emerges when logically related markets misprice their relationship. The researchers found over 7,000 markets with measurable combinatorial mispricings.

Example: “Trump wins the presidency” and “Republican wins the presidency” are related outcomes. If Trump wins, Republicans win. But the inverse isn’t true. A Republican could win without Trump being the nominee.

When market A trades at 55% probability and logically dependent market B trades at 50%, sophisticated traders construct multi-leg positions to exploit the inconsistency. If Trump at 55% exceeds Republican at 50%, that’s a logical impossibility creating arbitrage.

Combinatorial arbitrage requires deeper analysis and more capital, but offers larger spreads. The top three wallets in the IMDEA study earned $4.2 million combined, primarily through combinatorial strategies targeting political markets.

3. Cross-Platform Arbitrage (Polymarket vs Kalshi)

The most accessible arbitrage for retail traders exists between platforms. When Polymarket prices an event at 60% and Kalshi prices it at 55%, you buy “Yes” on Kalshi and “No” on Polymarket.

An SSRN study titled “Price Discovery and Trading in Prediction Markets” documented significant price disparities between platforms during the 2024 election. Polymarket generally led price discovery due to higher liquidity, but Kalshi often lagged by minutes, creating exploitable windows.

Cross-platform arbitrage faces unique challenges. Different settlement rules, varying fee structures, and the need to maintain capital on multiple platforms increase complexity. A dedicated Polymarket VPS or Kalshi VPS running 24/7 becomes essential for monitoring both platforms simultaneously.

Academic Research: The $40 Million Study

The paper “Unravelling the Probabilistic Forest: Arbitrage in Prediction Markets” (arXiv:2508.03474) provides the most comprehensive analysis of prediction market arbitrage to date.

Key Findings

Metric	Value
Total Arbitrage Profits	$40 million
Study Period	April 2024 – April 2025
Markets Analyzed	7,000+ with mispricings
Total Bets Examined	86 million
Top 3 Wallets’ Profit	$4.2 million
Top 3 Wallets’ Total Bets	10,200+

The researchers found arbitrageurs realized the most profits from political markets, specifically those concerning the 2024 U.S. presidential election. Sports markets had more frequent opportunities, but political market arbitrage offered larger spreads.

“Prediction markets are often treated as if they represent the collective intelligence of the crowd,” the authors wrote. “But our results show they can deviate significantly from probabilistic consistency, even in markets with substantial trading activity.”

What This Means for Traders

The study validates prediction market arbitrage as a legitimate strategy with substantial profit potential. However, it also reveals the competitive landscape. The top performers deployed sophisticated bots with sub-second execution. Manual traders captured a fraction of available opportunities.

The window is compressing. As institutional capital enters (ICE made a $2 billion investment), spread compression is inevitable. Traders need better infrastructure and faster execution to remain competitive.

Tools and Bots for Finding Arbitrage

Manual arbitrage identification is essentially impossible in 2026. By the time you calculate spreads across platforms, the opportunity has closed. Successful arbitrageurs rely on automated systems.

Open-Source Arbitrage Bots

Polymarket-Kalshi Arbitrage Bot monitors price discrepancies between both platforms in real-time. When YES + NO costs less than $1.00 across platforms, it executes both legs simultaneously. Available on GitHub with Python implementation.

OctoBot Prediction Market provides a visual interface for Polymarket strategies, including arbitrage detection. It’s designed for traders who want monitoring tools beyond basic Telegram alerts.

NautilusTrader offers institutional-grade integration with Polymarket’s CLOB API, supporting high-frequency execution with sub-millisecond latency.

Arbitrage Calculators

EventArb.com calculates cross-platform arbitrage opportunities in real-time. Enter current prices from Kalshi, Polymarket, Robinhood, and Interactive Brokers. The tool identifies profitable setups accounting for all fees.

GetArbitrageBets.com provides API access for building custom arbitrage systems, with alerts for opportunities across major prediction platforms.

Building Custom Solutions

Serious arbitrageurs build proprietary systems. Polymarket offers comprehensive API documentation, including a Python client (py-clob-client) connecting to their Central Limit Order Book. Kalshi provides REST API access with tiered rate limits based on account type.

High-performance implementations use Rust for sub-millisecond execution. One documented case: a developer earned $764 in a single day on December 21, 2025, using an automated bot on BTC-15m markets with only a $200 initial deposit.

Step-by-Step Execution Strategy

Here’s a systematic approach to prediction market arbitrage, from setup through execution.

Step 1: Platform Setup

Create verified accounts on both Polymarket and Kalshi. Polymarket requires a crypto wallet and USDC. Kalshi requires US residency verification and supports bank transfers.

Fund both accounts. You’ll need capital on each platform to execute both legs simultaneously. Starting capital of $1,000-$5,000 per platform is reasonable for testing strategies.

Step 2: Identify Matching Markets

Find identical or logically equivalent events across platforms. Common categories include:

• Political elections and primaries
• Economic indicators (Fed rate decisions, inflation data)
• Sports outcomes
• Cryptocurrency price targets

Verify that resolution criteria match. This is critical. The 2024 government shutdown incident proved why: Polymarket resolved “Yes” while Kalshi resolved “No” for the same event due to different settlement definitions.

Step 3: Calculate Arbitrage Spread

The formula is straightforward:

Arbitrage Profit = $1.00 – (Yes Price Platform A + No Price Platform B) – Total Fees

Example calculation:

• Polymarket “Yes” price: $0.58
• Kalshi “No” price: $0.38
• Combined cost: $0.96
• Polymarket 2% winner fee: $0.02
• Kalshi taker fee: ~$0.03
• Net profit: $1.00 – $0.96 – $0.05 = -$0.01 (unprofitable)

Fees matter. Spreads under 5-6% rarely generate profit after accounting for both platforms’ fees. Look for spreads exceeding 6% for reliable returns.

Step 4: Execute Simultaneously

Speed is everything. Execute both legs within seconds to avoid price movement erasing your spread. Automated systems handle this better than manual execution.

Research shows 75% of matched orders on Polymarket execute within about one hour on Polygon. For time-sensitive arbitrage, you need faster confirmation. Use higher gas fees during execution to prioritize your transactions.

Step 5: Wait for Resolution

Hold both positions until the event resolves. One position pays $1.00, the other pays $0.00. Your profit is locked in regardless of outcome.

Resolution timing varies by market. Political events may take days after election day. Sports markets typically resolve within hours.

Risks and Challenges

Prediction market arbitrage isn’t truly “risk-free.” Several factors can eliminate or reverse expected profits.

Settlement Risk

Different platforms may interpret the same event differently. The 2024 government shutdown case is instructive: Polymarket’s settlement standard was “OPM issues shutdown announcement,” while Kalshi required “actual shutdown exceeding 24 hours.”

Holding opposite positions meant total loss when resolutions diverged. Always verify resolution criteria before executing cross-platform arbitrage.

Execution Risk

Markets move between identification and execution. A 3% spread can become 0% in milliseconds. A 2025 study found that 78% of arbitrage opportunities in low-volume markets failed due to execution inefficiencies.

Slippage compounds across multiple legs. If you’re buying “Yes” on one platform and “No” on another, price movement on either side affects profitability.

Fee Erosion

Total fees can exceed expected profits:

Platform	Fee Structure
Polymarket	2% on winning positions
Kalshi	Up to 3% taker fee
Polygon Gas	~$0.01 per transaction

Combined fees of 5%+ mean spreads under 5% are unprofitable. Most retail-accessible opportunities hover around 2-3%, making them fee-negative.

Geographic Restrictions

Polymarket restricts US users due to regulatory uncertainty. Using VPNs to circumvent restrictions violates terms of service and risks account freezes with forfeited balances.

Kalshi is US-only and fully CFTC-regulated, but has faced legal challenges. Massachusetts sued Kalshi in September 2025 for allegedly operating unlicensed sports betting, citing over $1 billion in wagers during H1 2025.

Regulatory risk is real. Platforms can halt trading, freeze funds, or change rules. Diversify across platforms cautiously.

Liquidity Constraints

Popular markets have decent volume, but niche events feature wide spreads and shallow order books. A $1,000 arbitrage trade might only fill $100 at the displayed price.

Large orders move markets. If you’re trading size, your own execution can eliminate the arbitrage opportunity before you complete both legs.

Infrastructure Requirements

Successful arbitrage requires reliable, low-latency infrastructure. Home internet connections and manual monitoring aren’t sufficient for capturing time-sensitive opportunities.

Why VPS Matters

Arbitrage windows close in milliseconds. A delay of 50-100ms can mean the difference between profit and loss when spreads run 1-3%. Using a low-latency VPS reduces execution delays to 1-30ms.

Professional arbitrage systems deploy on servers located near major financial hubs. New York proximity matters for Kalshi’s US-based infrastructure. Proximity to Polygon nodes matters for Polymarket execution.

Some VPS providers report execution speeds as fast as 0.52ms for Polymarket traders, with 1Gbps connections that can burst to 10Gbps during high-activity periods.

24/7 Monitoring Requirements

Markets don’t sleep. A significant arbitrage opportunity could emerge at 3 AM when you’re not watching. Automated systems running on dedicated infrastructure capture opportunities human traders miss.

For traders running algorithmic trading strategies, the same infrastructure principles apply. Continuous uptime, low latency, and reliable execution are non-negotiable.

Recommended Setup

• VPS Specifications: Minimum 2 CPU cores, 4GB RAM, SSD storage
• Location: New York for US market proximity
• Network: 1Gbps with burst capability
• Uptime: 99.9%+ guaranteed
• OS: Linux for bot deployment, Windows for GUI-based tools

NYCServers offers dedicated VPS solutions optimized for prediction market trading. Our Polymarket VPS provides low-latency connectivity to Polygon nodes, while our Kalshi VPS is positioned near US financial infrastructure for minimal execution delay.

Realistic Profit Expectations

Headlines about $40 million in extracted arbitrage profits are exciting. But context matters.

What Top Performers Earn

The top three wallets in the IMDEA study averaged approximately $1.4 million each over 12 months. They placed over 10,200 combined bets, suggesting an average profit of roughly $400 per trade.

These aren’t retail traders clicking buttons. They’re sophisticated operators with custom infrastructure, dedicated capital, and algorithmic execution.

Realistic Retail Expectations

Individual traders using semi-automated tools might capture a fraction of available opportunities. With $5,000 deployed capital and realistic 1-2% returns per successful arbitrage, expect:

• 5-10 opportunities captured per month (manually assisted)
• $50-100 profit per successful trade
• $250-1,000 monthly gross profit
• Reduced by fees, slippage, and failed executions

Prediction market arbitrage is better suited as a supplementary strategy than a primary income source for retail traders.

Scaling Challenges

Larger positions face diminishing returns. Order book depth limits how much you can execute at displayed prices. Moving $100,000 through prediction markets requires splitting orders across time and markets, reducing effective spread capture.

The arms race favors well-capitalized, technologically sophisticated participants. Institutional entry (ICE’s $2 billion investment) signals increasing competition and tighter spreads ahead.

Getting Started: A Practical Roadmap

If you’re convinced prediction market arbitrage fits your strategy, here’s how to begin.

Week 1: Education and Setup

• Read Polymarket and Kalshi documentation thoroughly
• Create and verify accounts on both platforms
• Fund with small initial capital ($500-1,000 each)
• Explore markets manually to understand pricing dynamics

Week 2-3: Manual Identification

• Use EventArb.com to identify potential opportunities
• Track spreads over time without executing
• Document how quickly opportunities close
• Calculate realistic profit after all fees

Week 4+: Automation

• Deploy monitoring tools on a VPS
• Test open-source bots with minimal capital
• Build or customize systems for your strategy
• Scale capital as you validate profitability

Frequently Asked Questions

Is prediction market arbitrage legal?

Arbitrage itself is legal. Platform-specific regulations vary. Kalshi operates legally for US residents under CFTC regulation. Polymarket restricts US users, though enforcement has been inconsistent. Always verify your jurisdiction’s rules before trading.

How much capital do I need to start?

Minimum $2,000-5,000 split across platforms. More capital enables capturing larger opportunities, but start small while learning execution dynamics.

Can I do this manually without bots?

Technically yes, but profitably unlikely. Opportunities lasting seconds require automated detection and execution. Manual traders might capture occasional large spreads, but will miss the majority of opportunities.

What’s the biggest risk?

Settlement mismatch across platforms. If Polymarket and Kalshi resolve the same event differently, you lose on both positions. Always verify resolution criteria match before executing cross-platform arbitrage.

How do fees affect profitability?

Combined fees of 5%+ (Polymarket 2% + Kalshi 3%) mean spreads under 5% are unprofitable. Target opportunities with 6%+ spreads for reliable returns.

Do I need programming skills?

For serious arbitrage, yes. Open-source bots exist, but customization and maintenance require technical competence. Non-programmers can use calculator tools for manual identification, accepting lower capture rates.

How has institutional entry affected opportunities?

Spreads are compressing as professional capital enters. Opportunities that paid 3-5% in 2024 now pay 1-2%. Speed and infrastructure advantages matter more than ever.

Build Your Arbitrage Infrastructure

Prediction market arbitrage rewards speed, reliability, and continuous operation. Whether you’re monitoring spreads across Polymarket and Kalshi or running automated execution bots, infrastructure determines success.

NYCServers provides trading-optimized VPS hosting with 1ms latency to major financial infrastructure. Our NY4 data center location offers direct connectivity for minimal execution delay. Plans start at $25/month with 100% uptime guarantees during trading hours and 24/7 support.

For traders serious about prediction market arbitrage, reliable VPS infrastructure isn’t optional. It’s the foundation that makes capturing fleeting opportunities possible.

Get started with our dedicated prediction market VPS solutions:

• Polymarket VPS — Optimized for Polygon network connectivity
• Kalshi VPS — Low-latency access to US-based infrastructure