Research Reveals That Only a Small Percentage of Traders Contribute to Prediction Market Accuracy

A recent scandal involving a Green Beret who was arrested for betting on a classified U.S. raid may be more than just an isolated incident, as a new study suggests that it could be an extreme example of the small group of informed traders who drive prices on platforms like Polymarket. The study, conducted by researchers from London Business School and Yale, analyzed over 1.7 million accounts and $13.7 billion in trading volume on Polymarket from 2023 to 2025. The findings indicate that just 3% of traders are responsible for the majority of price discovery, meaning they are the ones who move prices towards the correct outcome. These traders consistently predict outcomes and move prices in the right direction, while the remaining 97% of traders mostly provide liquidity and generate volume, but ultimately end up on the losing side of trades. The researchers used a unique approach to distinguish between skill and luck, rerunning each trader's bets 10,000 times with the same markets, moments, and dollar amounts, but with the direction of the trade determined by a coin flip. The results showed that among the biggest winners, only 12% consistently beat the benchmark, and many apparent winners did not sustain their performance over time. The study's findings have significant implications for our understanding of how prediction markets work, suggesting that it is the informed traders who drive market accuracy, rather than the collective knowledge of the crowd. The researchers also found that when skilled traders account for a larger share of trading, prices move closer to the correct outcome, especially in the final stretch before resolution. Furthermore, the study highlights the risk of insider trading, where traders may use non-public information to make informed bets, and raises questions about the mechanisms in place to prevent such activities. The paper cites a concrete example of this risk, where three newly created Polymarket accounts placed large bets on a contract related to the removal of Nicolás Maduro from power in Venezuela, just before the operation took place. While there is no evidence of wrongdoing in this case, the incident underscores the potential for insider trading to occur in prediction markets.