A recent scandal involving a Green Beret arrested for betting on a classified U.S. raid may be more than an isolated incident, as a new study suggests that a small group of informed traders, like the accused soldier, significantly influence prices on platforms like Polymarket, while the majority of participants incur losses. This 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 indicate that a mere 3% of traders are responsible for the majority of price discovery, consistently predicting outcomes and moving 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, reversing the direction of their trades. The results showed that among the biggest winners, only 12% outperformed the simulated benchmark, and many apparent winners were found to be lucky rather than skilled. The study also found that when skilled traders account for a larger share of trading activity, market accuracy improves, especially in the period leading up to the resolution of an event. Furthermore, these skilled traders are the first to react to new information, such as Federal Reserve announcements or corporate earnings, whereas 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. The researchers highlight 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 the outcome before the event. While insider trades are rare and concentrated in a few events, the study challenges the conventional wisdom that prediction markets work due to the collective knowledge of their participants, instead suggesting that they work because of the presence of informed traders.