A recent scandal involving a Green Beret accused of 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 represent an extreme example of a small group of informed traders who significantly influence prices on platforms like Polymarket, while the majority of participants incur losses. 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 a mere 3% of traders are responsible for the majority of price discovery, consistently predicting outcomes and driving prices in the right 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, using the same markets, moments, and dollar amounts, but with the direction of the trade determined by a coin flip.
The results showed that only 12% of the biggest winners by raw profit consistently outperformed the benchmark, while many apparent winners were found to be merely lucky. The study also found that when skilled traders account for a larger share of trading, prices tend to move closer to the correct outcome, particularly in the final stages before resolution. Furthermore, these traders are often the first to react to new information, such as Federal Reserve announcements or corporate earnings, while other traders exhibit little consistent response.
However, the same edge that makes skilled traders valuable to price discovery raises concerns when they may be trading on non-public information. Both Polymarket and Kalshi have explicitly stated that trading on non-public information is strictly prohibited. The paper highlights the risks associated with insider trading, citing the example of the US removal of Nicolás Maduro from power in Venezuela.
In the days leading up to the operation, three newly created Polymarket accounts placed unusually large bets on a contract asking whether Maduro would be removed, with the market pricing the odds at around 10% at the time. The accounts collectively made over $630,000 when the raid occurred, with two of the accounts ceasing trading activity soon after and the third becoming mostly dormant. While there is no evidence of wrongdoing on these accounts, the incident underscores the potential risks associated with insider trading. The study's findings challenge 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.