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

A recent scandal involving a Green Beret accused of betting on a classified U.S. 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 but influential group of informed traders who significantly impact prices on platforms like Polymarket, while the broader crowd incurs losses. The study, conducted by researchers from 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 a mere 3% of traders are responsible for the majority of price discovery, meaning they are the ones who drive prices towards the correct outcome. These traders consistently demonstrate an ability to predict outcomes and move prices in the right direction, whereas the remaining 97% of traders generally do not. The latter group provides liquidity and generates volume but tends to be on the losing side of trades against the informed minority. Distinguishing between skill and luck is a significant challenge, as many traders may accumulate substantial winnings by chance alone. To address this, the researchers simulated each trader's bets 10,000 times, keeping all parameters constant except the direction of the trade. This allowed them to establish a benchmark for what each trader's profits would look like without any real edge. The results show that among the biggest winners by raw profit, only 12% outperformed the benchmark, and many apparent winners did not sustain their performance over time. The activity of skilled traders improves market accuracy, with prices moving closer to the correct outcome, especially in the final stages before resolution. They are also the first to respond to new information, adjusting their positions in reaction to events such as Federal Reserve announcements or corporate earnings, whereas other traders exhibit little consistent reaction. However, the same edge that makes skilled traders valuable to price discovery raises concerns when that information is not public or is not supposed to be. Both Polymarket and Kalshi have stated that trading on non-public information is strictly prohibited. The study highlights the risk associated with insider trading, citing the example of the U.S. removal of Nicolás Maduro from power in Venezuela in January. In the days leading up to the operation, three newly created Polymarket accounts placed unusually large bets on a contract asking whether Maduro would be removed, with the market pricing the odds at around 10% at the time. The accounts collectively made over $630,000 when the raid occurred, with two accounts ceasing trading soon after and the third becoming mostly dormant. While there is no evidence of wrongdoing on these accounts, insider trades, when they do occur, tend to move prices more aggressively per dollar, approximately seven to 12 times more than typical skilled trades. Nevertheless, such trades are rare and concentrated in a handful of events, rather than being the primary driver of price discovery. The study's findings challenge the conventional wisdom that prediction markets work due to the collective knowledge of their participants, instead suggesting that they work because of the influence of a small group of informed traders.