A recent scandal involving a Green Beret arrested for betting on a classified U.S. raid may be more than an isolated incident, as a new study reveals that a small group of informed traders are responsible for driving prices on prediction markets. The study, conducted by researchers from London Business School and Yale, analyzed over 1.7 million accounts and $13.76 billion in trading volume on Polymarket, finding that just 3% of traders account for most price discovery.
These traders consistently predict outcomes and move prices in the right direction, while the remaining 97% provide liquidity but often end up on the losing side of trades. The researchers used a novel approach to filter out luck from skill, rerunning each trader's bets 10,000 times with the direction of the trade randomized. The results show that only 12% of the biggest winners by raw profit consistently outperform the benchmark, and many apparent winners do not sustain their performance over time. The activity of skilled traders improves market accuracy, particularly in the final stretch before an event's resolution, and they are also the first to react to new information.
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. The study highlights the risk of insider trading, citing a concrete example of three newly created accounts that placed large bets on a contract related to the U.S.
removal of Nicolás Maduro from power in Venezuela, collectively making over $630,000. While insider trades are rare and concentrated in a handful of events, the findings challenge the idea that prediction markets work due to the collective knowledge of participants, instead suggesting that they work because of the informed traders who drive prices.