A recent scandal involving a Green Beret who allegedly bet on a classified US raid using insider information may be more than an isolated incident, according to a new study. The research suggests that this individual may be part of a small but influential group of traders who significantly impact the accuracy of prediction markets. 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, and found that a mere 3% of traders are responsible for the majority of price discovery.
These traders consistently demonstrate an ability to predict outcomes and move prices in the right direction, while the remaining 97% of traders tend to lose money. The researchers used a novel approach to distinguish between skilled traders and those who are simply lucky, by simulating each trader's bets 10,000 times and comparing the results to a coin flip. The findings indicate that only 12% of the biggest winners by raw profit can be attributed to skill rather than luck. Furthermore, the study shows that when skilled traders account for a larger share of trading, market accuracy improves, particularly in the final stages before an event's resolution.
However, the research also raises concerns about the potential for insider trading, citing the example of a US operation in Venezuela where three newly created accounts placed large bets on the outcome, making over $630,000 in profits. While such instances are rare, they highlight the need for prediction markets to ensure that trading is based on publicly available information. Ultimately, the study challenges the conventional wisdom that prediction markets work due to the collective knowledge of their participants, instead suggesting that it is the informed minority that drives market accuracy.