Research Reveals Only a Small Percentage of Traders Drive Prediction Market Accuracy

A recent scandal involving a Green Beret who was arrested for betting on a classified US raid may be more than just an isolated incident. A new study suggests that this individual may be part of a small group of informed traders who have a significant impact on prediction markets, such as Polymarket. The study, conducted by researchers from the London Business School and Yale, analyzed over 1.7 million accounts and $13.7 billion in trading volume on Polymarket between 2023 and 2025. The results show that just 3% of traders are responsible for the majority of price discovery, meaning they are the ones who drive prices towards the correct outcome. These traders consistently make accurate predictions and move prices in the right direction, while the remaining 97% of traders largely do not. Instead, they provide liquidity and generate volume, but ultimately end up on the losing side of trades against the informed minority. The study's findings challenge the idea that prediction markets work due to the collective knowledge of the crowd. Rather, they suggest that it is the informed traders who drive market accuracy. The researchers used a unique approach to filter out luck from skill, rerunning each trader's bets 10,000 times to determine whether their profits were due to chance or actual skill. The results show that among the biggest winners, only 12% consistently outperformed the benchmark, and many apparent winners did not sustain their performance over time. The study 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. However, the study also raises concerns about the risk of insider trading, particularly when information is not publicly available. The researchers cite the example of the US removal of Nicolás Maduro from power in Venezuela, where three newly created Polymarket accounts placed large bets on the outcome before the event occurred. While there is no evidence of wrongdoing, the incident highlights the potential risks associated with trading on non-public information.