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The job of the pricer

A market needs a price for every bucket, at every moment, that always forms a coherent distribution. LMSR, the Logarithmic Market Scoring Rule, does this. It reads the shares held in each bucket and returns a price for each, on one continuous curve.

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What you feel as a trader

  • Buying a bucket raises its price; selling lowers it. The curve rebalances so probabilities sum to one.
  • Bigger trades move the price more. Depth is set by alpha, the liquidity parameter.
  • There is always a quote. You never wait for a matching counterparty; the rule prices both sides.

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Why LMSR, not an order book

An order book over a numerical range needs a resting bid and ask on every bucket. Thin markets leave gaps. LMSR is a single automated maker over the whole range, so depth is shared across every bucket and every range stays tradable.

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Alpha sets the depth

High alpha means deep liquidity and small price impact. Low alpha means a shallower book and larger impact. Alpha is configured per market and decays over the market’s life. See alpha decay.