A recent scandal involving a Green Beret arrested for wagering on a classified U.S. operation initially seemed like an isolated incident within prediction markets.
However, a new study suggests that this event may be a symptom of a more significant issue: a small group of informed traders who drive price movements on platforms like Polymarket, while the majority of participants incur losses. The study, conducted by researchers from London Business School and Yale, analyzed 1.72 million accounts and $13.76 billion in trading volume on Polymarket from 2023 to 2025.
The findings indicate 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 do not exhibit this level of accuracy and primarily provide liquidity and generate volume, ultimately losing money to the informed minority. To distinguish between skill and luck, the researchers simulated each trader's bets 10,000 times, reversing the direction of their trades.
This approach allowed them to establish a benchmark for determining whether a trader's profits were a result of skill or chance. The results show that among the top winners, only 12% 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 activity, market accuracy improves, particularly in the period leading up to the resolution of an event. Furthermore, these traders are the first to react to new information, adjusting their positions in response to events such as Federal Reserve announcements or corporate earnings reports. However, the same expertise that makes skilled traders valuable to price discovery raises concerns when they possess non-public information.
Both Polymarket and Kalshi have stated that trading on non-public information is strictly prohibited. The researchers highlight a specific case in which three newly created Polymarket accounts placed large bets on a contract related to the U.S. removal of Nicolás Maduro from power in Venezuela, collectively earning over $630,000. While there is no evidence of wrongdoing in this instance, the study notes that insider trades, when they occur, can have a significant impact on prices.
Nevertheless, such trades are rare and typically concentrated around specific events, rather than being the primary driver of market accuracy. The findings of this study challenge the conventional wisdom that prediction markets work due to the collective knowledge of their participants, instead suggesting that they are driven by the expertise of a small group of informed traders.