# Using Financial Instruments to Transfer the Information Security Risks
## 8 Evaluation
### Carry out Evaluation
#### 8.3.6 Increased Liquidity  
Liquidity is an important characteristic for the trading of ISD and is of high importance for market stakeholders. However, as the ISD will facilitate the trading of precisely defined underlying events, all the ISD may not be of interest to all the market participants. Furthermore, the ISD are expected to provide trading opportunity in a wide variety of risk instruments with a wide variety of underlying events, the liquidity in these narrowly defined instruments is expected to be limited. In such a scenario, Automated Market Makers (AMM) can be used to inject additional liquidity in the market and improve the efficiency of the market. AMM's have been heavily studied in the literature [128; 129; 130; 131; 132; 133; 134; 135; 136]. The two widely implemented AMM mechanisms in the prediction market domain are Dynamic Pari-mutuel Market (DPM) [135] and Market Scoring Rules (MSR) [133]. These mechanisms can be used in an ISPM to provide virtually infinite liquidity, improve market efficiency and motivate traders to trade at any time without waiting for a corresponding (matching) order.  
DPM is a hybrid of a pari-mutuel market and a Continuous Double Auction (CDA) mechanism. DPM allows to place wagers on the exclusive outcomes of the underlying events in the future. After the true outcome is known, all the money lost by the traders who bet on the incorrect outcomes is redistributed to the traders who bet on the correct outcome. DPM provides infinite liquidity and each dollar wagered in a DPM buys a variable share of the payoff based on the state of the market. The automated market-maker in DPM will always quote a price for ISD. Thus, traders can easily purchase contracts at the quoted price. However, automated market-maker will not buy back the derivative contracts, and the contracts can be sold through Continuous Double Auction Mechanism. Thus, despite an unlimited liquidity on the buy side, the liquidity on the sell side is limited. The mechanism allows continuous incorporation of new information and the risk to the market operator is bounded.  
MSR combines the scoring rules with CDA. MSR can be used to reward traders in combinatorial information (prediction) markets for incremental improvements in the forecast of the underlying event. MSR acts as a market maker and aggregates the information on the entire probability distribution over a set of variables. If a trader believes that the probability distribution is wrong at any given time, then he can pay off the trader who made the last prediction and replaced the probability distribution with his/her prediction. The payout to the last trader is determined by the scoring rule. In this process, each new trader will be paid off for improving the prediction of the previous trader. However, if the trader makes a worse prediction then s/he stands to lose money. In the end, the final trader is paid out by the market based on how far his/her prediction is from the actual outcome. MSR allows continuous information incorporation and guarantees liquidity at all times and on both sides of the market. Though, the market operator is exposed to some risk, but the risk is bounded. Later, Hanson proposed a logarithmic MSR to act as the market maker[137].