Polymarket Launches Trading Desk to Bet Against Users, Raising Conflict Fears

Polymarket, a New York-based prediction market startup, is forming an in-house trading team to compete directly with its customers, according to Bloomberg. This move mirrors a similar strategy already employed by its main rival, Kalshi, which has drawn criticism and legal scrutiny. . The new unit will take positions against customer bets on outcomes ranging from sports events to corporate product launches and political developments.

The hiring initiative has involved reaching out to traders, particularly those with experience in sports betting, to build the internal market-making team. This development raises questions about potential conflicts of interest and whether the platform will retain its reputation as a neutral venue for crowd-sourced forecasting. Kalshi's own in-house unit, Kalshi Trading, has faced accusations that it resembles a traditional sportsbook, with critics arguing it undermines the integrity of the market.

The company has previously faced regulatory hurdles in the U.S., having been blocked from operating in 2022 and fined $1.4 million for regulatory violations. Now, with its return and recent approval from the Commodity Futures Trading Commission (CFTC), Polymarket is expanding its market model in a way that could put it at odds with both its users and regulators.

Risks to the Outlook

A key concern is that the in-house team could create an unfair advantage over retail users. By taking the opposite side of bets, Polymarket could potentially profit from market movements, a practice critics say blurs the line between a prediction market and a traditional sportsbook. This model has already drawn legal action against Kalshi, with a proposed class-action lawsuit alleging that its market-making unit sets unfavorable odds for customers as reported by Bloomberg.

The strategy also raises ethical and reputational questions. Polymarket has built its brand on being a transparent platform that reflects the collective wisdom of its users rather than acting as the "house." By hiring traders to profit from customer bets, the company could erode trust among its user base and deter participation. Critics, including statistics professor Harry Crane, argue that the move could backfire, generating more legal and public relations challenges than it is worth.

What This Means for Investors

For institutional investors, the introduction of an internal trading desk could reduce the perceived informational value of Polymarket's data. If market movements are influenced by in-house traders with access to privileged information or order-flow data, the platform's ability to serve as a reliable barometer of public sentiment may be compromised. This could affect the platform's credibility among major financial institutions, which rely on prediction market data as part of their forecasting tools.

Additionally, the shift may impact Polymarket's valuation. The company recently raised its valuation to $12 billion, partly driven by its re-entry into the U.S. and its partnership with Intercontinental Exchange (ICE). However, if the in-house team is seen as a revenue-generating move rather than a service improvement, it could undermine the platform's appeal to long-term investors who are drawn to its novelty and neutrality.

The platform's future also depends on how it navigates the regulatory landscape. While prediction markets are treated as derivatives under CFTC rules, they remain in a legal gray area, particularly in terms of insider trading and market manipulation. Polymarket's internal trading desk could attract closer scrutiny from regulators, especially if users perceive it as operating with unfair advantages or inconsistent rules.

Analysts Are Watching

Market analysts are closely watching how Polymarket's new strategy affects user engagement and trading volume. The company's recent success, particularly during the 2024 U.S. election cycle, was partly due to its reputation for providing real-time, crowd-sourced probabilities. Any shift that undermines this perception could result in lower liquidity and reduced participation.

Some observers believe the move is a necessary step for the platform to become a more sustainable business model. Without fees or subscription models, Polymarket has limited ways to generate revenue. However, they caution that the potential profits from a trading desk are relatively small compared to the company's current valuation.

Others worry that the strategy could set a dangerous precedent for the prediction market industry. If other platforms follow Polymarket's lead, the lines between prediction markets and traditional betting could become even more blurred. This could lead to increased regulatory pressure and pushback from users who joined these platforms precisely to avoid the house edge.

Polymarket has yet to comment publicly on the new hiring initiative. As it moves forward with the internal trading team, the company will need to balance its financial goals with the trust and transparency that have made it a key player in the prediction market space.