Research Reveals Only a Small Percentage of 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 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 London Business School and Yale, analyzed 1.72 million accounts and $13.76 billion in trading volume on Polymarket between 2023 and 2025. The findings indicate that a mere 3% of traders are responsible for the majority of price discovery, consistently predicting outcomes and moving 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. Distinguishing between skill and luck is a significant challenge, as many traders may accumulate substantial winnings by chance alone. To address this issue, the researchers simulated each trader's bets 10,000 times, using the same markets, moments, and dollar amounts, but with the direction of the bet determined by a coin flip. This approach enabled 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, particularly in the period leading up to the resolution of an event. They are also the first to respond to new information, 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 they are acting on non-public information. Both Polymarket and Kalshi have stated that trading on non-public information is strictly prohibited. The paper cites a concrete example of this risk, involving the US removal of Nicolás Maduro from power in Venezuela. In the days and hours preceding 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. When the raid occurred, these accounts collectively made over $630,000, with two of the accounts ceasing trading activity soon after and the third becoming mostly dormant. While there is no evidence of wrongdoing on these accounts, insider trades can 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 driving the day-to-day price discovery process. The study's findings challenge the notion that prediction markets work due to the collective knowledge of their participants, instead highlighting the crucial role of informed traders.