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 represent an extreme example of the small group of informed traders who actually 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 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 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, keeping all factors constant except the direction of the trade. The results showed that among the biggest winners, only 12% 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 like Federal Reserve announcements or corporate earnings. However, the same edge that makes skilled traders valuable to price discovery raises concerns when they possess non-public information.
The researchers highlight the risk of insider trading, citing a concrete example involving 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 the contract, collectively making over $630,000 when the event occurred.
While there is no evidence of wrongdoing, the incident underscores the potential risks associated with insider trading. The study's conclusions challenge the conventional wisdom that prediction markets work due to the collective knowledge of their participants. Instead, the findings suggest that the accuracy of these markets depends on the presence of informed traders who consistently outperform the crowd.