CHAPTER 6 OF 15

How prices work

A FIRM market needs a price at every moment, even in the first second it opens, before a single trade has happened, and even if only one person ever trades it. Most exchanges solve this by matching a buyer to a seller, which means a market with no interest has no price at all. FIRM solves it differently: every market is priced by an automated market maker that always quotes both sides, no matching required.

The market maker always has a price

Think of the market maker as a standing counterparty. It will always sell you YES shares, and it will always sell you NO shares, at a price that depends only on how many of each have already been sold. Nobody has to be on the other side of your trade in real time. That is what makes it possible for a brand-new market with zero traders to already show a live YES and NO price the moment it opens.

Price is the crowd's probability

YES and NO always add up to $1. If YES is priced at 58 cents, NO is priced at 42 cents, and the market is saying the crowd currently thinks there's roughly a 58 percent chance of YES. Every trade nudges that number: buying YES pushes the YES price up and the NO price down by the same amount, because more people are willing to pay more to hold the winning side. Selling does the reverse. Over the life of a market, the price traces out the crowd's changing belief as new information, and new trades, arrive.

Cost is known before you trade

Before you confirm any trade, FIRM shows you the exact number of shares you will get, the average price you are paying across those shares, the fee, and what you would be paid if you are right. Larger trades move the price more than smaller ones, the same way a big order moves any market, and that is shown to you before you commit, never discovered afterward.

The market's worst case is bounded and known in advance

Because the market maker always quotes a price, it always carries some risk on the other side of every trade. That risk is not open-ended. The math behind the pricing rule guarantees the market maker's total possible loss on any single market has a fixed, calculable ceiling, known in advance, no matter how the trading goes. That is what makes it safe to let a market maker always quote a price instead of waiting for a matching buyer and seller: the worst case is a known number, not a risk that could spiral.

The exact formula behind all of this, the same one used to price every market on FIRM today, is in the appendix for anyone who wants to see the math. The everyday experience of it is simpler than the formula: buy YES, the YES price goes up a little; sell YES, it goes down a little; the market is always there to trade against, and the price is always a live read of what the crowd currently believes.