A recent scandal involving a Green Beret who was 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 be an extreme example of the small group of informed traders who actually influence prices on platforms like Polymarket, while the majority of participants end up losing money. The study, which analyzed 1.72 million accounts and $13.76 billion in trading volume on Polymarket from 2023 to 2025, found 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 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 randomly deciding the direction of the trade.
The results showed that among the biggest winners, only 12% consistently outperformed the simulated benchmark, indicating that many apparent winners were simply lucky. The study's findings have significant implications for the functioning of prediction markets, suggesting that it is the activity of skilled traders that 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 also raises concerns when they may be acting on non-public information. 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 handful of events, 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 informed traders who drive price discovery.