A recent scandal involving a Green Beret arrested for wagering on a classified U.S. raid initially seemed like an isolated incident for prediction markets. However, a new study indicates that this may be a symptom of a more significant issue: the presence of a small group of informed traders who, like the accused soldier, significantly influence prices on platforms like Polymarket, while the majority of traders incur losses around them. This study, which analyzed 1.72 million accounts and $13.76 billion in trading volume from 2023 to 2025, found 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 tend to be on the losing side of trades against the informed minority. The challenge lies in distinguishing between skill and luck, as many traders may accumulate substantial winnings by chance alone.
To address this, the researchers simulated each trader's bets 10,000 times, reversing the direction of their trades to establish a benchmark for what their 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 when their results were checked against a separate sample of events.
The study's findings suggest that the activity of skilled traders improves market accuracy, particularly in the final stages before resolution, and that they are 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 paper 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 asking whether Maduro would be removed, collectively making over $630,000 when the raid occurred.
While insider trades are rare and concentrated in a handful of events, the market's accuracy still relies on repeat traders who consistently outperform rather than on one-off bets, challenging the notion that prediction markets work due to the collective knowledge of the crowd.