Polymarket’s plan to put a house trader on its platform: a liquidity fix that carries legal and trust risks

What changed and why it matters now

Polymarket, a crypto-native prediction market, is moving to run an in-house market maker that will trade directly on its platform. The change is being pitched as a simple fix: thinner spreads, faster fills and steadier prices when user orders are sparse. For traders and anyone watching the business model, it’s immediate and practical — better trading conditions in the short term.

But the shift matters for two deeper reasons. First, any platform that both hosts markets and trades in them creates a conflict of interest. Second, the U.S. regulatory environment for event and prediction markets is tense right now. Recent enforcement attention on similar businesses means Polymarket’s decision will be judged not only by its impact on liquidity, but by whether it invites fresh action from regulators or causes users to lose trust.

How a built‑in market maker would actually work — and where user conflicts appear

A market maker, whether run by a third party or by the platform itself, supplies buy and sell interest so trades happen quickly. Practically, a house market maker will post bids and offers across prediction contracts, step in when retail demand dries up and manage inventory so the platform isn’t left holding risky positions.

On paper this is familiar: the house earns the spread, captures fees and reduces volatility. In practice an internal desk has tools others don’t: direct access to the order book, insight into latent order flow and the platform’s matching engine. That lets the house manage exposure efficiently — but it also creates predictable conflict points. If the platform collects information on large user orders before matching, the house could use that insight to take the opposite side. If execution priority, fee structures or order routing favor the house, users will pay via worse prices or hidden slippage.

Users mainly feel the effects in two ways. Good outcome: fills become faster and priced more fairly when markets are thin. Bad outcome: occasional moves that look like the platform trading ahead of customers or selectively tightening markets where it benefits the house. That damage to reputation can erode volumes, which undercuts the whole liquidity argument.

Regulatory red flags: where U.S. watchdogs and state rules may push back

The legal line between a prediction market, a gambling site and a regulated derivatives or securities exchange is blurrier than most users assume. The Commodity Futures Trading Commission (CFTC) has jurisdiction over certain event contracts that look like derivatives; the Securities and Exchange Commission (SEC) steps in when offerings resemble securities. States also have gambling and wagering laws that can be invoked if a platform’s design looks like betting.

Recent industry examples show regulators are active. Some prediction platforms have faced scrutiny or had to change their product mix to comply with regulators’ views about what constitutes a permitted contract. Running an in-house trading desk elevates the regulatory profile: a platform that takes principal risk may look less like a neutral venue and more like an operator of betting or exchange activity, which invites licensing questions and disclosure requirements.

For investors, the key legal risks are licensing delays, enforcement actions and rules that force structural changes (for example, requiring independent market making or strict Chinese walls). Any of those outcomes would hit revenue and user growth, at least temporarily.

Why Polymarket might take this route as it chases U.S. users and volume

There are pragmatic drivers behind the move. As Polymarket expands into larger U.S. audiences, it faces an obvious problem: prediction markets live or die by liquidity. Retail order flow is lumpy; big events create one-sided books. A proprietary market maker smooths that out, making the platform more attractive to high-frequency traders and professional liquidity takers.

Recruiting experienced prop traders or sports-betting liquidity providers makes sense from a product point of view. Those traders are skilled at managing short-term inventory and pricing binary outcomes quickly. For the company, the economics are straightforward: by internalising market making, the platform keeps some of the margin that would otherwise go to external market makers, and it can fine-tune fees to capture more revenue.

Competitors will respond in two ways. Some will follow with their own in-house desks. Others will double down on third-party, publicly disclosed market making and tighter governance — promoting independence as a trust advantage. That could split the sector between faster, more aggressive platforms and those selling safety and transparency.

Investor implications and concrete things to watch next

From an investor or trader perspective, this is a mixed setup.

Liquidity and spreads: Expect an initial improvement. Trades should be cheaper and execution faster when the in-house desk is active.
Revenue and margins: If the house captures market‑making profits, reported take rates could rise. That is positive for top-line economics in the near term.
Trust and retention: The upside is fragile. Any evidence of unfair execution or opaque order handling will push users to rivals and shrink volumes.
Regulatory exposure: This is the larger tail risk. Watch filings, formal correspondence from the CFTC or SEC, and state attorneys general. Any notice of examination or enforcement could cause a quick repricing for businesses in this space.

Specific events to monitor: statements of policy changes on the platform; public letters or enforcement actions from federal or state regulators; quarterly volume and user‑retention figures; and disclosures about the market maker’s governance, profit sharing and information barriers. If Polymarket publishes rules that separate its trading desk from platform operations, treat that as a sign the company is trying to defuse legal and reputational risk. If it does not, assume elevated enforcement probability.

Bottom-line for traders and investors: the move can work commercially — it often does — but it raises governance and compliance issues that could turn into costly setbacks. For now, treat it as a revenue‑positive but risk‑heavy development: a boost to liquidity and margins that comes with a clear tradeoff in legal exposure and user trust.

Photo: RDNE Stock project / Pexels

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