A recent scandal involving a Green Beret arrested for betting on a classified U.S. 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 users 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 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 moving prices in the right direction. In contrast, the remaining 97% of traders primarily provide liquidity and generate volume, but tend to be 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 bet determined by a coin flip. The results showed that only 12% of the biggest winners by raw profit consistently outperformed the benchmark, and many apparent winners did not sustain their performance over time. The study's findings have significant implications for the functioning of prediction markets, suggesting that the activity of skilled traders improves market accuracy, particularly in the final stages before an event's resolution.
These traders are also the first to react to new information, adjusting their positions in response to events such as Federal Reserve announcements or corporate earnings. However, the same edge that makes skilled traders valuable to price discovery raises concerns when they may be acting on non-public information. Both Polymarket and Kalshi have stated that trading on non-public information is strictly prohibited. The study highlights the risk of insider trading, citing the example of the U.S.
removal of Nicolás Maduro from power in Venezuela, where three newly created Polymarket accounts placed unusually large bets on the event before it occurred, collectively making over $630,000. While insider trades are rare and concentrated in a few events, they can have a significant impact on prices. 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.