A recent 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 study, which analyzed data from Polymarket, suggests that a small group of informed traders are responsible for driving the accuracy of prediction markets, while the majority of traders lose money.
The researchers analyzed over 1.7 million accounts and $13.7 billion in trading volume, and found that just 3% of traders are responsible for most of the price discovery, meaning they are the ones moving prices towards the correct outcome. These traders consistently predict outcomes and move prices in the right direction, while the remaining 97% of traders provide liquidity and generate volume, but ultimately lose money. The study also found that it is difficult to distinguish between skill and luck, and that many traders who appear to be winners may be simply lucky.
To filter out luck, the authors simulated each trader's bets 10,000 times, and found that only 12% of the biggest winners consistently outperformed the simulation. The findings suggest that the activity of skilled traders improves market accuracy, and that they are the first to react to new information.
However, the study also raises questions about the risk of insider trading, and the potential for traders to use non-public information to gain an edge. The paper cites the example of the US removal of Nicolás Maduro from power in Venezuela, where three newly created accounts placed large bets on the outcome before the event occurred. While there is no evidence of wrongdoing, the incident highlights the potential risks of insider trading in prediction markets.