Market Microstructure Noise
Market microstructure noise comes from how trades are executed, not from new facts. Small trades, order timing, bid–ask spreads, or low liquidity can all create tiny price movements that look meaningful but aren’t. These effects are especially common over short time frames.
In prediction markets, microstructure noise appears when probabilities flicker or jump even though nothing important has happened. On platforms like Polymarket, Kalshi, Myriad, and Manifold, this often shows up in thin markets or during quiet periods. In prediction markets data, it looks like minor volatility that quickly reverses or disappears.
This noise does not mean the market is broken. It is a normal byproduct of trading mechanics. The key is separating mechanical movement from information-driven change.
Why It Matters
Market microstructure noise can mislead short-term analysis. Understanding it helps analysts avoid overinterpreting small moves in prediction markets data.
Why does market microstructure noise occur in prediction markets?
It occurs because prices respond to every trade, even when the trade carries little information. Low liquidity, wide spreads, and execution timing can amplify these effects. In prediction markets data, this creates brief movements that don’t reflect real belief changes.
How can analysts distinguish noise from real information?
Noise-driven moves tend to be small, short-lived, and unsupported by volume or follow-up trades. Information-driven moves usually persist and attract broader participation. Comparing price changes with liquidity and timing helps filter noise in prediction markets data.
Does microstructure noise affect long-term forecast accuracy?
Usually not. Over time, real information dominates and noise averages out. However, noise can matter for high-frequency analysis or short-term decision-making using prediction markets data.
Real-World Example
In a low-activity market on Manifold, a small trade nudges the probability up a few points. Minutes later, another trade reverses the move. No news appears, showing the movement was driven by microstructure noise rather than new information.
Market Microstructure Noise and FinFeedAPI
Analyzing microstructure noise requires fine-grained, time-stamped data. FinFeed's Prediction Markets API provides detailed prediction markets data that allow analysts to identify noise, smooth short-term fluctuations, and focus on information-driven trends.