Research Reveals That a Small Group of Informed Traders Drives Prediction Market Accuracy, Not the Collective Crowd

A recent scandal involving a Green Beret arrested for betting on a classified U.S. 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 users incur losses. The study, which analyzed 1.72 million accounts and $13.76 billion in trading volume from 2023 to 2025, discovered that just 3% of traders are responsible for the majority of price discovery, meaning they drive prices towards the correct outcome. These traders consistently predict outcomes and move prices in the right direction, while the remaining 97% 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 challenge, as many traders may accumulate significant winnings by chance alone. To address this, the researchers simulated each trader's bets 10,000 times, keeping all factors constant except the direction of the trade. This allowed them to establish a benchmark for what each trader's profits would look like without any actual edge. The findings indicate 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 final stages before resolution, and they are also the first to react to new information, such as Federal Reserve announcements or corporate earnings. However, the same edge that makes skilled traders valuable to price discovery raises concerns when that information is not public or is not supposed to be. 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 accounts placed unusually large bets on a contract related to the event before the market price moved. While insider trades are rare and concentrated in a handful of events, the findings challenge the idea that prediction markets work due to the collective knowledge of the crowd, instead suggesting that they work because of the presence of informed traders.