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📊 Polymarket Market-Making Bot

📈 Market-making bot for Polymarket prediction markets with a fair-value model using BTC momentum (Binance WebSocket) and order book imbalance signals. Two-sided YES/NO quoting, inventory skewing, risk kill-switches, and a backtesting simulator with PnL tracking.

Personal Project2023–2024
GitHub

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TypeScriptNode.jsPolymarket CLOB APIBinance WebSocketREST APIs

Polymarket Market-Making Bot

🔭 Overview

A market-making bot for Polymarket prediction markets that goes beyond simple spread posting. It implements a fair-value model informed by external market microstructure signals — BTC price momentum and order book imbalance — to generate adaptive two-sided quotes that adjust dynamically to market conditions.

❓ The Problem

Naive market-making on prediction markets is a losers' game: if you just post fixed spreads, informed traders pick off your quotes whenever a signal moves. Profitable market-making requires a fair-value estimate that's continuously updated based on observable signals, plus risk controls to limit inventory exposure.

🛠️ What I Built

📊 Fair-Value Model

  • 📈 BTC momentum signal: Binance WebSocket feed provides real-time BTC price; momentum (recent directional move) is used as a proxy for broader market risk sentiment, adjusting fair value of correlated prediction markets
  • ⚖️ Order book imbalance signal: Polymarket CLOB order book is analyzed in real time; high bid-side imbalance shifts fair value toward YES, high ask-side imbalance shifts toward NO
  • 🔄 Combined signal produces a continuously-updated fair value estimate for each market

💬 Quote Generation

  • 📝 Two-sided YES/NO quotes generated around fair value with configurable base spread
  • 📏 Spread widens automatically when volatility is elevated (volatility kill-switch)
  • 🔄 Quotes are repriced on every signal update — no stale orders

📦 Inventory Management

  • 📐 Inventory skewing: when long YES, widen the YES ask and tighten the NO ask to reduce exposure
  • 🚫 Max position limits: configurable per-market position caps, bot stops quoting when limit is hit
  • 📊 Inventory PnL tracking: marks positions to fair value for real-time unrealized PnL

🛡️ Risk Controls

  • 📉 Spread kill-switch: halts quoting if spread collapses below minimum profitability threshold
  • ⚡ Volatility kill-switch: halts quoting during extreme BTC volatility (unreliable fair-value conditions)
  • 🛑 Manual override: kill-switch commands for immediate position exit

🧪 Backtesting Simulator

  • 🔄 Round-based backtesting framework replays historical Polymarket CLOB data
  • 📊 Simulates fill probability based on historical order flow
  • 💰 PnL tracking per round: realized spread income, inventory mark-to-market, position costs

⭐ Key Highlights

  • 📊 Fair-value model using external signals (BTC momentum + order imbalance) — not static spread posting
  • 📐 Inventory-aware quoting with dynamic skewing
  • 🛡️ Multiple kill-switches for risk management in volatile conditions
  • 🧪 Full backtesting framework with historical data replay and PnL tracking