It was Jerry Seinfeld who gave the world “shrinkage” when his pal George Costanza got caught with his pants down after a dip in the pool.
Thirty-two years later, a whole new crop of people are getting caught with their pants down, metaphorically speaking, in prediction markets.
Yesterday’s shrinkage is today’s slippage.
Slippage, for those who don’t know, is a simple concept in the world of finance: You put in an order at one price, but it fills at another. You think you’re buying at $5. The order executes at $5.01. Or $5.02. Or worse.
That’s slippage.
Now, a whole new generation of sports bettors are wandering into prediction markets with sportsbook expectations. They see a price and assume that’s the price.
Except prediction markets are not sportsbooks. They are exchanges. There is an order book, available liquidity. There are market orders and limit orders. And if you don’t know the difference, you will find out, quickly and expensively.
This, more or less, is what set DraftKings co-founder Matt Kalish off in his R-rated rants on X against Kalshi when he noticed the odds of a Brooks Koepka major win were one thing if betting $10, and a whole ‘nuther thing if betting $10,000.
Kalish’s example was extreme, but the underlying complaint was not crazy. A sports bettor sees one thing on the screen and expects that thing to be true when the bet goes through. In an exchange-style market, especially a thin one, that is not always how it works.
This is not “Kalshi stole my money.” It is more like: I acted like a sports bettor in a trader’s market.
Moving the line
“It’s like making a bet at a sportsbook, and when you confirm it, the line moves and it doesn’t ask you again. It just fills it,” Captain Jack Andrews of Unabated said. “You were betting -110 and you get filled at -120. Nobody would like that. It feels a little dirty.”
On a sportsbook, if the line moves while you are trying to bet, you usually get a warning. The book asks if you still want the new number. On an exchange, if you use a market order, you are essentially saying: Fill me now at the best available prices until my order is done.
That is fine if the market is deep.
It is less fine if the market is shallow, weird, niche, or sitting on a bunch of tiny price levels with not much behind them.
“The average person, the line I used in the video is probably the best way to explain it,” Andrews said. “It’s buying something at the price you want, but getting filled at a worse price.”
So how do you avoid it?
The boring answer: Do not generally use market orders. Use limit orders.
Andrews said the major markets, the big sports sides and totals, usually have enough liquidity that a normal bettor is not going to blow through the book when placing a marker order.
“Where you might run into it is if you’re betting on a prop, or something esoteric, like will there be a run scored in the first inning,” he said.
He also offered one more practical tip: Be careful with “good til canceled” orders.
If you leave an order live after first pitch, kickoff, or tipoff, you may get filled after the game state has changed. Maybe you wanted the Phillies before the game. Maybe you did not want them after they fell behind 5-0 in the first inning.
“Good til canceled is probably a little bit risky because that’s good til canceled even after the game starts,” Andrews said. “I always advise people don’t use good til cancel, just use at game start.”
Tick tock
John Shilling of GoldenPants.com gave the cleanest way to spot where slippage danger lives: tick size.
“The smaller the tick size, the more slippage there’ll be,” Shilling said.
That sounds backward at first. Smaller ticks feel more precise, and precision feels safer. But in some markets, especially golf outrights and other longshot-style markets, tiny tick sizes can mean liquidity gets scattered across a bunch of little price levels. There may be a decent amount sitting at the very top of the book, but not much behind it.
So you see one price. You think that is the price. But if your order is bigger than what is sitting there, the rest of your order starts climbing the ladder.
Say you see 46 cents. You want $200 worth. But there are only enough shares available at 46 cents to fill part of your order. The rest fills at 47, then maybe 48, then maybe worse, depending on what is actually sitting in the book.
Golf is the prime suspect here, Shilling said, because a lot of the outright markets live in the first or last 10 cents, and the prices can move in tiny increments. A Brooks Koepka to win for a few bucks might get you one price. A Brooks Koepka to win for a lot of bucks might get you a very different blended price.
The only real way to know is to look at the book, or at least stress-test the order.
“One thing you can do is you can kind of put in different amounts,” Shilling said. “Put in $1, see what the price is for $1. OK, that’s the top of the market, or top of the book. And then you can write like $10,000 and you can see how the price changes to see how thick it is.”
Not a perfect solution. But it beats clicking blindly.
An NFL moneyline, Shilling said, is the opposite. Big, fat, and deep.
“If 54 is a good level, you could conceivably sit there at 54 and trade three million shares,” he said.
So: The smaller the market, and the more decimal-pointy the pricing, the more careful you need to be?
“Exactly,” Shilling said. “That’s exactly it.”
Old school
None of this is new, by the way. Prediction market bettors are not the first people to learn the hard way that the price on the screen and the price in your account are not always the same thing.
Crypto traders have been living with this, and worse, for years. A recent paper, “Sandwiched and Silent,” written by a data scientist and a research scientist, looked at traders getting hit by so-called sandwich attacks, where bots see an order coming, jump in front of it, move the price, then sell back into the trade they just made worse.
Real losses. And sometimes very little obvious warning to the person on the other end.
And this is not just blockchain weirdness. In 1988, Harvard finance professor André Perold wrote “The Implementation Shortfall: Paper vs. Reality,” which is basically the grown-up version of the same complaint: There is the price you thought you were getting, and there is the price you actually got.
On paper, you won. In reality, you are down a few cents.
A few cents does not sound like much, but stack it across every trade, every week, all season, and it can become the difference between a winning year and a losing one.
So the advice is boring, but simple: Use limit orders. Be careful in thin markets. Be extra careful in props, golf outrights, novelty markets, and anything with tiny tick sizes and not much sitting behind the best price. Do not leave orders hanging around after the game starts unless you really know what you are doing.
And remember the key difference between a sportsbook and an exchange: At a sportsbook, if the line moves, you’ll get asked if you still want it. On an exchange, if you use a market order, the question isn’t asked, and the answer is yes.
The good news? Unlike shrinkage, slippage is avoidable.
