ParlayMarket: Automated Market Making for Parlay-style Joint Contracts
This addresses the need for coherent pricing and liquidity in prediction markets for joint events, such as sports parlays or financial scenario bets, representing a novel method for a known bottleneck rather than an incremental improvement.
The paper tackles the problem of inefficient pricing and fragmented liquidity in prediction markets for joint outcomes by introducing ParlayMarket, an automated market-making design that supports parlay-style contracts, showing that it converges to a best approximation of the true joint distribution with bounded parameter error and controlled monetary loss scaling quadratically with the number of markets.
Prediction markets are powerful mechanisms for information aggregation, but existing designs are optimized for single-event contracts. In practice, traders frequently express beliefs about joint outcomes - through parlays in sports, conditional forecasts across related events, or scenario bets in financial markets. Current platforms either prohibit such trades or rely on ad hoc mechanisms that ignore correlation structure, resulting in inefficient prices and fragmented liquidity. We introduce ParlayMarket, the first automated market-making design that supports parlay-style joint contracts within a unified liquidity pool while maintaining coherent pricing across base markets and their combinations. Our main result is a convergence characterization of the resulting system. Under repeated trading, the AMM dynamics converge to a unique fixed point corresponding to the best approximation to the true joint distribution within the model class. We show that (i) parameter error remains bounded at stationarity due to a balance between signal and noise in trade-induced updates, and (ii) pricing error and monetary loss scale with this parameter error, implying that aggregate market-maker loss remains controlled and grows at most quadratically in the number of base markets. These results establish explicit limits on the information-retrieval error achievable through the trading interface. Importantly, parlay trades play a structural role in this convergence: by providing direct constraints on joint outcomes, they improve identifiability of dependence structure and reduce steady-state error relative to markets that rely only on marginal trades. Empirically, we show both in controlled simulations and in replay on historical Kalshi parlay data that this design achieves the intended scaling while remaining effective in realistic market settings.