Hold to Settlement vs Exit Early: Cost Tradeoffs
The core tradeoff
In prediction markets you typically have two ways to realize PnL:
• Hold to settlement (you get paid by the final outcome)
• Exit early (you sell your position before settlement)
Holding can reduce costs. Exiting early can reduce risk. You choose between cost friction and flexibility.
Why holding to settlement can be cheaper
If you hold to settlement, you usually pay trading costs only once:
• Entry execution cost, measured by effective spread
• Entry fees
You often avoid a second execution through the order book, which means you avoid exit spread, slippage, and exit fees. Your cost profile is closer to one way all in cost, not round trip cost.
Why exiting early can be the better decision
Exiting early adds cost, but buys you flexibility:
• You reduce exposure to late information and headline risk
• You can reallocate capital to better opportunities
• You avoid being forced to hold through illiquid or unstable periods
Costs: what changes when you exit early
Exiting early turns a one way cost into a round trip cost:
• Entry effective spread and fees
• Exit effective spread and fees
Exit costs are often worse than entry costs because liquidity can shrink and spreads can widen closer to key events or deadlines.
When hold to settlement makes sense
• Your edge is small and you cannot afford round trip friction
• The market is thin and exits are expensive
• Your thesis is long horizon and you do not need capital liquidity
• You have low probability of needing to cut the position quickly
When exiting early makes sense
• Your thesis is invalidated (new info changes your probability estimate)
• Liquidity is collapsing and you prefer certainty now
• You want to lock profit and reduce tail risk
• You need to reduce exposure for portfolio or risk limits
A simple decision rule
Ask two questions:
• Is my edge still real after including expected exit costs
• If I wait, is there a realistic scenario where I will be forced to exit in worse liquidity
If the answer to the second question is yes, model a worse exit and see if the trade still makes sense.
Worked example
You enter at a cost of 5c all in (one way). If you exit later, the expected exit cost is also 5c.
• Hold to settlement: expected cost about 5c total
• Exit early: expected cost about 10c total
If your edge is only 7c, exiting early can turn a good prediction into a losing trade after costs.
Takeaway
Holding to settlement can be a cost advantage. Exiting early can be a risk advantage. The right choice depends on liquidity, your edge, and how likely you are to need an urgent exit.
Related
• All In Cost: Spread, Slippage, and Fees in One Number