Study Reveals Only a Small Percentage of Traders Drive Accuracy in Prediction Markets

A recent scandal involving a Green Beret arrested for betting on a classified US 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 a small group of informed traders who actually influence prices on platforms like Polymarket, while the majority of traders lose money around them. The study, conducted by researchers from the 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 just 3% of traders are responsible for most price discovery, meaning they are the ones who move prices towards the correct outcome. These traders consistently predict outcomes and move prices in the right direction, while the remaining 97% of traders mostly do not, instead providing liquidity and generating volume, but ultimately losing money to the informed minority. The researchers used a novel approach to distinguish between skill and luck, rerunning each trader's bets 10,000 times with the same markets, moments, and dollar amounts, but with the direction of the bet determined by a coin flip. This allowed them to establish a benchmark for what each trader's profits would look like with no real edge. The results show that among the biggest winners by raw profit, only 12% beat the benchmark, and many apparent winners did not sustain their performance over time. The activity of skilled traders improves market accuracy, with prices moving closer to the correct outcome, especially in the final stretch before resolution. They are also the first to react to new information, shifting positions in response to events like 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 US 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 happened. 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 informed traders who drive price discovery.