A recent scandal involving a Green Beret arrested for wagering on a classified US raid may be more than an isolated incident, as a new study suggests it could be an extreme example of the small group of informed traders who drive price movements on platforms like Polymarket, while the majority of participants incur losses. This study, conducted by researchers from the London Business School and Yale, examined the core premise of the prediction market industry - that mass participation leads to accuracy. By analyzing 1.72 million accounts and $13.76 billion in trading volume on Polymarket from 2023 to 2025, the researchers found 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 primarily provide liquidity and generate volume, but ultimately end up on the losing side of trades against the informed minority. The challenge lies in distinguishing between skill and luck, as many traders may accumulate significant winnings by chance alone.
To address this, the researchers simulated each trader's bets 10,000 times, reversing the direction of the trades to establish a benchmark for what their profits would look like without any actual edge. The results showed that among the top winners by raw profit, only 12% outperformed the benchmark, and many apparent winners did not sustain their performance when their results were checked against a separate sample of events. The activity of skilled traders improves market accuracy, with prices moving closer to the correct outcome, especially in the final stages before resolution. They are also the first to react to new information, adjusting their positions in response to events like Federal Reserve announcements or corporate earnings, whereas other traders exhibit little consistent reaction.
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. Both Polymarket and Kalshi have stated that trading on non-public information is strictly prohibited. The study highlights the risk associated with insider trading, citing the example of the US removal of Nicolás Maduro from power in Venezuela in January.
In the days and hours 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 roughly 10% at the time. The new accounts collectively made over $630,000 when the raid occurred, with two accounts stopping trading entirely soon after and the third becoming mostly dormant. While there is no evidence of wrongdoing on these accounts, insider trades, when they occur, move prices more aggressively per dollar, approximately seven to 12 times more than typical skilled trades.
Nevertheless, they are rare and concentrated in a handful of events, rather than being the primary driver of price discovery. The findings challenge the notion that prediction markets work due to the collective knowledge of their participants, instead suggesting that they work because of the informed traders who drive market accuracy.