Research Reveals That a Small Group of Informed Traders Drives Prediction Market Accuracy

A scandal involving a Green Beret who was 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 the 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 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. 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 bet determined by a coin flip. The results showed 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 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. Furthermore, these traders are the first to react to new information, such as Federal Reserve announcements or corporate earnings, while other traders exhibit little consistent reaction. However, the same edge that makes skilled traders valuable to price discovery raises concerns when they may be acting on non-public information. Both Polymarket and Kalshi have stated that trading on non-public information is strictly prohibited. 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 large bets on the event before it occurred, collectively making over $630,000. While insider trades are rare and concentrated in a few events, the study's findings challenge the idea that prediction markets work due to the collective knowledge of their participants, instead suggesting that they work because of the informed traders who drive price discovery.