New Study Reveals Only a Small Fraction of Traders Drive Prediction Market Accuracy

A recent scandal involving a Green Beret arrested for wagering on a classified U.S. raid may be more than an isolated incident, as it highlights the significant influence of a small group of informed traders on prediction markets. According to a new study, these individuals, like the accused soldier, have a substantial impact on price movements on platforms such as 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 suggest that a mere 3% of traders are responsible for the majority of price discovery, consistently predicting outcomes and driving prices in the correct 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. This approach allowed them to establish a benchmark for what each trader's profits would look like without any real edge. 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 activity of skilled traders was found to improve market accuracy, with prices moving closer to the correct outcome, especially in the final stages before resolution. These traders were also the first to react to new information, adjusting their positions in response to events such as Federal Reserve announcements or corporate earnings. However, the same edge that makes skilled traders valuable to price discovery raises concerns when they are trading on non-public information. The study highlights the risk of insider trading, citing the example of the U.S. 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 price movements. The findings challenge the notion that prediction markets work due to the collective knowledge of their participants, instead suggesting that they work because of the influence of a small group of informed traders.