Study Reveals Only a Small Percentage of Informed Traders Drive Prediction Market Accuracy

A recent scandal involving a Green Beret arrested for betting on a classified US raid may be more than an isolated incident, according to a new study. The research suggests that this individual may represent an extreme example of a small group of informed traders who drive price movements on platforms like Polymarket, while the majority of participants incur losses. The study, conducted by researchers from the London Business School and Yale, analyzed 1.72 million accounts and $13.76 billion in trading volume on Polymarket from 2023 to 2025. The findings indicate that just 3% of traders are responsible for most price discovery, consistently predicting outcomes and moving prices in the right direction. In contrast, the remaining 97% of traders provide liquidity and generate volume but tend to be on the losing side of trades. To distinguish between skill and luck, the researchers simulated each trader's bets 10,000 times, using the same markets, moments, and dollar amounts but randomly deciding whether to buy or sell. The results showed that among the biggest winners, only 12% consistently outperformed the simulated benchmark, while many apparent winners did not sustain their performance over time. The study also found that when skilled traders account for a larger share of trading, prices move closer to the correct outcome, especially in the final stages before resolution. These traders are also the first to react to new information, such as Federal Reserve announcements or corporate earnings. However, the same edge that makes skilled traders valuable to price discovery raises concerns when they may be trading on non-public information. Both Polymarket and Kalshi have stated that trading on non-public information is against their rules. The paper highlights a specific case where three newly created Polymarket accounts placed unusually large bets on a contract related to the US removal of Nicolás Maduro from power in Venezuela, collectively making over $630,000. While there is no evidence of wrongdoing, the incident underscores the risk of insider trades. The study's findings challenge the notion that prediction markets work due to the collective knowledge of their participants, instead suggesting that they work because of the presence of informed traders.