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

A recent scandal involving a Green Beret accused of 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 be an extreme example of a small group of informed traders who actually influence prices 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 a mere 3% of traders are responsible for the majority of price discovery, consistently predicting outcomes and driving prices in the right direction. In contrast, the remaining 97% of traders primarily provide liquidity and generate volume, but ultimately end up on the losing side of trades against the informed minority. 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 with the direction of the trade determined by a coin flip. This approach 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 react to new information, adjusting their positions in response to events like 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 they possess non-public information. The paper highlights the risk of insider trading, citing the example of the US removal of Nicolás Maduro from power in Venezuela, where three newly created Polymarket accounts placed unusually large bets on the contract before the event, collectively making over $630,000. While insider trades are rare and concentrated in a handful of events, they can have a significant impact on prices. The study's findings challenge the conventional wisdom that prediction markets work due to the collective knowledge of their participants, instead suggesting that they are driven by the actions of a small group of informed traders.