Settlement
Settlement is the process of finalising a trade or contract and transferring the resulting value to the appropriate participants. In prediction markets, settlement generally occurs after the market's outcome has been resolved.
✦ Key Insight
A trader can correctly predict what happens in the real world and still face problems if they did not understand the contract's settlement conditions. Traders should know: What determines the outcome Which data source is authoritative When the market settles How ambiguous events are handled What happens if an event is cancelled How winnings are paid
✕ Common Misconceptions
Not reading market rules
Assuming news headlines determine resolution
Ignoring timezone definitions
Confusing market close with settlement
Failing to understand disputed outcomes
Assuming every market settles instantly
Detailed Explanation
How It Works
For a prediction market, the contract first reaches its resolution event.
A predetermined source or resolution process establishes the outcome.
Eligible positions then settle according to the contract rules.
On Polymarket, its documentation describes settlement as occurring after the market is resolved, with trades settled through blockchain smart contracts.
For futures and other financial instruments, settlement mechanics can differ significantly.
FAQs
Is settlement the same as market resolution?
They are related but distinct. Resolution determines the outcome; settlement applies the financial result.
Can settlement be delayed?
Yes, depending on market rules and disputes.
Why should I read the resolution source?
Because it determines how the contract is judged.
In Practice
Dig Deeper
Prediction Market
A prediction market is a market where participants trade contracts whose value depends on the outcome of a future event. The event could involve economics, politics, sports, cryptocurrency, weather, or another measurable outcome. The CFTC describes products traded on prediction markets as frequently being called event contracts.
Event Contract
An event contract is a financial contract whose payout depends on whether a specified event or outcome occurs. Event contracts are commonly associated with prediction markets. The CFTC specifically discusses prediction markets and event contracts within US derivatives regulation.
Binary Option
A binary option is a contract with two primary possible settlement outcomes based on whether a defined condition is met. Unlike owning an asset, the trader is taking a position on a specific yes-or-no condition.
Implied Probability
Implied probability is the probability that traders infer from the market price of an outcome contract. In simple prediction markets where a winning share settles at $1, a share trading around $0.65 is often interpreted as approximately a 65% market-implied chance of the outcome occurring.