Executable Arbitrage and Market Efficiency in Prediction Markets
Deterministic payoff identities imply no-arbitrage bounds in winner-takes-all prediction markets, but violations of these bounds need not be exploitable before settlement. We distinguish payoff-space no-arbitrage, which follows from terminal payoffs, from protocol-executable no-arbitrage, which depends on the position transformations available to traders. Polymarket's negative-risk markets make this distinction observable: linked binary markets represent mutually exclusive outcomes, while the NegRisk Adapter operationalizes only the NO-to-YES direction before settlement. We reconstruct depth-aware executable portfolio values and combine them with actor-level transaction histories and on-chain conversion traces to measure payoff-bound violations and exploitation. Our reconstruction estimates \$1.12 million in arbitrage profit across two realization channels: \$1.086 million from converter-enabled strategies and \$32 thousand from settlement-based basket formation. In the CLOB sample, positive violations concentrate on the unsupported YES side, whereas adapter-supported NO-side violations are substantially less frequent and shorter-lived. These patterns are consistent with the view that pre-settlement conversion strengthens enforcement by reducing capital lock-up and enabling inventory recycling. Finally, we implement a prototype bidirectional extension of the NegRisk Adapter that makes the reverse path executable before settlement. Together, our findings show that market efficiency depends not only on payoff structure, but also on whether protocols expose payoff equivalences as executable primitives.