Strategy — Appendix
title: Strategy — Appendix parent_document: Cornice Strategies — Working Artifact type: appendix status: working last_updated: 2026-01-13
Strategy — Appendix
Purpose Provide expanded explanatory material supporting Section 4.1 of Cornice Strategies. This appendix elaborates on strategic postures (market-making, selective directional exposure, and arb-only), and documents known families of arbitrage-style opportunities in prediction markets.
Status Working material. Subject to revision as Cornice clarifies business intent, operational defaults, and risk posture.
Market-making vs. Selective Directional Exposure
Market-making
Market-making means you are continuously quoting both sides of a contract (posting bids and asks), attempting to earn the spread and/or any available maker incentives by providing liquidity.
Characteristics:
- You place resting limit orders on both sides of the book.
- You expect intermittent fills and must manage inventory (positions) over time.
- The edge is micro: spread capture, queue priority, rebates, and structural advantages.
Market-making is not about being “right” on the event outcome. It is about being paid to intermediate trades and absorb short-term imbalance.
Plain-language translation: you behave somewhat like the house, earning small edges repeatedly.
Selective Directional Exposure
Selective directional exposure means taking a view on an outcome (or explicitly hedging one).
Characteristics:
- You buy YES or NO because you believe the implied probability is mispriced.
- You may hold exposure for minutes, hours, or longer.
- The edge is macro: information, modeling, judgment, or portfolio construction.
Plain-language translation: you are betting (or hedging), not collecting spread.
“Arb-only” (Near-arbitrage in Event Contracts)
What you are describing—spending, for example, $0.90 total for a guaranteed $1.00 payout within less than an hour—is a form of arbitrage or near-arbitrage in prediction markets.
This is achieved by structuring a paired trade whose combined payoff is fixed (or almost fixed), while the total cost is strictly less than that payoff.
Two blunt realities:
-
True guarantees decay quickly. If the opportunity is genuinely risk-free, it is usually short-lived (often competed away by automation), or it relies on assumptions that can break: fees, partial fills, settlement semantics, void/dispute rules, or simple execution failure.
-
Prediction-market “arbs” often fail at the edges. What looks like a lock can become exposure due to slippage, mismatched fills, or rule asymmetries between venues.
That said, these opportunities do exist, especially in thin or fast-moving markets, and Cornice’s design explicitly aims to detect and manage them.
Common Families of Arb-style Opportunities
1. Complementary YES / NO Mispricing (Cross-venue)
Classic pattern:
- Venue A: buy YES at price
p_yes - Venue B: buy NO at price
p_no
If:
p_yes + p_no + fees < $1.00
then the combined position pays $1.00 at settlement regardless of outcome.
This matches the intuitive “$0.90 → $1.00” framing.
Critical caveats:
- Both legs must fill at intended prices and sizes.
- Market resolution semantics must be truly equivalent.
- Fees (especially on regulated venues) can erase thin margins.
2. Complete-set (Dutch book) Mispricing
In markets with multiple mutually exclusive outcomes (A/B/C/…), it is sometimes possible to buy a complete set of outcomes for less than $1.00 total.
Because exactly one outcome must resolve true, the combined payoff is fixed at $1.00.
This appears more often in categorical markets than in simple binaries and is sensitive to liquidity distribution across outcomes.
3. Time-lag / Leader–Laggard Effects (Cross-venue)
One venue reprices rapidly on new information; another lags.
The opportunity exists only if:
- you can enter on the lagging venue before repricing
- you can hedge or offset exposure on the leading venue
This class of opportunity is highly competitive and often dominated by speed and automation.
The Real Line Between Arb and Risk
An “arb-only” posture is only truly arb-like until something fails.
The decisive moment is when the second leg does not fill immediately.
At that point, Cornice must follow a declared default behavior:
- Unwind the primary leg (attempt to cancel or offset)
- Hedge at a worse price (accepting a reduced edge)
- Tolerate bounded exposure for a fixed, pre-approved window
This single policy choice determines whether:
- Cornice operates as a tight, conservative arb system, or
- Cornice becomes a stealth directional system that occasionally drifts into risk.
That decision should be explicit, enforced in code, and auditable.
End of Strategy Appendix