Liquidity Staircase
Sequence participants from active retail traders to natural institutional hedgers
- Difficulty
- Expert
- Time to result
- ~ongoing to results
- Steps
- 6
- Confidence
- 93%
Build liquidity in stages rather than attempting to recruit the largest institutions first. Begin with informed retail participants who trade smaller amounts but do so frequently, creating baseline activity, pricing, and product feedback. Once the marketplace demonstrates repeat usage, connect it to established broker platforms so more users can access the same contracts without adopting an unfamiliar standalone venue. Greater distribution and volume then justify participation by market makers, proprietary trading firms, and hedge funds that improve depth and spreads. Only after the market can support larger orders should the exchange recruit insurers, corporations, and other natural hedgers with significant real-world exposure. Each stage creates the conditions required by the next, gradually transforming a niche product into a full financial ecosystem.
Origin
Extracted from Masters in Business, where Luana Lopes Lara laid out Kalshi's intended progression from informed retail traders to brokers, professional firms, and large natural hedgers.
Core principles
- 01Start with participants who can trade before deep liquidity exists
- 02Use frequent small trades to establish baseline activity
- 03Expand distribution through existing broker channels
- 04Add professional liquidity providers after volume becomes credible
- 05Recruit natural hedgers once the market can absorb institutional size
How to run it
- 1
Win an informed niche
Recruit early users who understand related instruments and can evaluate the new contracts without extensive education.
Pro tip Start with a community already accustomed to probability, risk, and frequent trading.
Watch out A broad untargeted launch may produce registrations without meaningful liquidity.
- 2
Create trading velocity
Offer relevant recurring markets and reduce friction so small participants trade repeatedly.
Pro tip Track repeat volume and bid-ask quality, not just total account creation.
Watch out Headline volume can conceal shallow or one-off activity.
- 3
Add broker distribution
Make the products available through established brokerage accounts and interfaces.
Pro tip Prioritize brokers whose customers resemble the marketplace's successful early adopters.
Watch out Integrations added before product-market fit can consume resources without creating durable activity.
- 4
Recruit professional liquidity
Bring in market makers, proprietary shops, and specialist funds once sufficient order flow exists.
Pro tip Show historical spreads, volume, and market behavior to demonstrate the opportunity.
Watch out Professional firms will not remain if expected flow cannot cover their operating costs.
- 5
Onboard natural hedgers
Target companies, insurers, and institutions with direct exposure to the events being traded.
Pro tip Design contracts around risks they already measure and budget for.
Watch out Large hedgers can overwhelm an immature order book.
- 6
Deepen the ecosystem
Expand contract coverage, clearing, data distribution, and participant diversity while maintaining market quality.
Pro tip Use liquidity thresholds to decide when each new market or participant class is ready.
Watch out Scaling contract count faster than liquidity can fragment the marketplace.
In the wild
Kalshi began by focusing on informed retail options traders. Its planned next stage was brokerage distribution through firms such as Interactive Brokers or E-Trade, followed by prop shops, hedge funds, insurers, and corporations with risks they could naturally hedge.
→ Each participant class would add the volume or depth needed to make the next class viable.
A marketplace for a specialized agricultural contract first recruits active regional traders, then integrates with commodity broker software. As volume and price continuity improve, it brings in market makers before approaching major food producers seeking to hedge procurement risk.
→ The venue develops enough depth to accommodate larger commercial orders without destabilizing prices.
Common mistakes
Starting with the largest institutions
Large natural hedgers need depth and reliable execution that a brand-new marketplace generally cannot provide.
Confusing users with liquidity
Account growth matters less than repeat trading, tight spreads, and orders available on both sides.
Listing too many thin markets
Excessive contract variety fragments order flow and prevents individual markets from reaching useful depth.
Is it for you?
Best for
It is best for new exchanges and two-sided financial marketplaces that must build depth before large institutions can participate effectively.
Not ideal for
It is not ideal for platforms whose transactions are infrequent, nonstandardized, or unable to support repeat liquidity.
From the transcript
“I think we see it as a beaut up of liquidity from from retail. That's like smaller amounts, but but but higher velocity to to…”
“the next step for us is getting brokers in to offer our markets in their platform”
“then bringing up the volume we can bring up like actual liquidity providers, prop shops, hedge funds, and then up until UM I guess insurance…”
From the episode
Luana Lopes Lara on Kalshi’s CFTC Approval Journey
Luana Lopes Lara