We study trading gains and losses on Polymarket, the largest prediction market. Using 588 million trades ($67 billion in volume), we show that the gains are highly concentrated: the top 1% of users capture 76.5% of profits. Successful traders provide liquidity using limit orders that resolve favorably relative to realized outcomes while unsuccessful traders take liquidity using market orders. Monthly performance is weakly persistent, however, this may represent sample selection rather than skill. A detailed analysis of the trading behavior of the most successful accounts suggests that "insider'' trading is unlikely to explain the performance of the largest winners.
The spreads on most markets always seemed like a hint that polymarket transferred wealth from the impatient that don't really understand how it works, to those that play mostly as patient market makers with just an educated guess.
The problem is that volume is generally too low to make significant money.
I'm not saying this as an argument for or against prediction markets, but that's essentially what the vig is at traditional sportsbooks.
Someone calculates what they think the odds of an outcome happening are and then they allow people to take positions on either side at worse odds than what they think the real odds are. As long as their prediction is correct, over time they make money. It's why putting $1 on a 50/50 bet on a sportsbook will usually only pay out around $1.91 instead of $2 if you win.
Yes. It's not only that, as we also find very successful traders who take directional bets on elections and sports. But among the most successful traders, a large fraction are acting as market makers. Note that acting like one is not enough. We also find many traders acting as market makers among the least successful, yet they don't lose as much as the top winners do.
insider trading on events probably wouldn't show any trends, right? These are point in time events (they call them markets), but they are finite and short lived. An insider would be a one and done thing, so it would be pretty hard to spot them or trend any sort of month over month insider scheming imo.
Also...
> We study trading gains and losses on Polymarket, the largest prediction market
This is not a natural thing to say and I fucking hate that it's impossible to know anymore if I'm wasting time replying to an AI/bot or not
Not meant to sound like AI, but most academic journals limit abstracts to 100 words, so they rarely feel natural...
I agree: insiders are hard to study because they are finite and short-lived. We're pretty confident there are insiders out there trading on Polymarket; however, our conclusion is that they don't account for a significant fraction of the total trading gains on the platform.
This is true if the stock market as well. There is insider trading. But that vast, vast majority of profits are made by the market makers (citadel etc).
Is that the case? I would expect long-term investors would make more profits from the stock market than market makers.
If the market-makers are making vastly more than long-term investors (who are making trillions), who is coming in and venting off the multiple trillions to keep the system feeding long-term investors well while market makers gorge themselves?
It's simpler when looking at prediction markets because of bounded payoffs and the zero-sum nature, so these are pure trading gains.
In equity markets, you have both the trading and investment components to account for. Market makers like Citadel don't invest; they aim to exit positions as quickly as possible to minimize risk and capital requirements. Long-term investors commit capital to risky assets and are compensated with a risk premium (expected to be positive, but it can turn out to be negative). Usually, the "cost" of liquidity paid by long-term investors is tiny related to the overall expected returns. In prediction markets, you don't have that.
Yes to put the other comment into different words, vast maj the excess returns (alpha as opposed to beta ), or the “slack” in markets , however you want to think of it, are picked up by market makers.
Difference between prediction markets and stock markets is prediction markets on a flat road and stock market on an uphill road
Some people feel strongly about defining jargon when using it - an article on here [1] the other day about Capture The Flag (CTF) hacking puzzle competitions was full of comments comparing the article didn’t say what CTFs were.
It’s not a useless qualifier. Many readers might not know that Polymarket is the biggest now, and if at some future date it’s not the biggest anymore the statement makes it clear why they studied at this time.
This is a familiar style in abstracts. Weird as it sounds, it’s normal to have some language implying the reader is a hermit living in a cave. If it sounds like something an AI would say, maybe it’s because models have been trained on academic papers?
I agree - you're not going to be an insider on a significant proportion of trades and it would be stupid to use the same account for more than a couple.
Insiders are going to be earning large amounts in single trades, either by betting a lot when it's odds-on or a small amount when it's out the odds (for a large return).
I think it's just bad tense, which I think makes it not AI amusingly.
Except this was a comment on hacker news, not an academic paper... on an article talking about prediction markets.
The context already exists, and there isn't any reason to tack that onto the end of what was said, and it doesn't matter for that sentence or the entire comment.
Just feels like something a agent being overly verbose/descriptive would say.
Another possibility could be that SEO for LLMs is now a thing, and keyword stuffing or model manipulation is going to take subtle things like `We study trading gains and losses on Polymarket, the largest prediction market.` and interpret that as fact, in order to, idk what to call it, trick?, brainwash? the model into internalizing "polymarket is the largest" into its trained dataset and then proceeding to recommend polymarket to people when they ask about prediction markets, even if isn't true anymore at that time.
The comment is the abstract of the paper verbatim. This is one of the authors posting their paper on HN, sharing their data, and answering questions. This not just normal and respectable behaviour, it's really cool.
> We find that the most successful users traded frequently in
sports markets, often for different teams (81% of the gains)
Am I missing something or is this almost the whole story? Sports betting apps ban users who are too successful. Polymarket doesn’t.
So if you have a killer football game prediction algorithm you’ll only be able to use it for so long on sports betting apps, but Polymarket won’t ban you. Plus the apps will limit the size of the bets you’re allowed to make.
> Sports betting apps ban users who are too successful. Polymarket doesn’t.
Polymarket is set up as a market between users. Someone has to be on the other side of the trade.
With betting apps, the house is on the other side of the trade. If you're too good they choose not to trade with you.
The alternative for the betting apps is to give worse payouts to everyone to cover for the wins of the long-tail experts. This would degrade the experience for the average bettor on the platform. Maybe that would be a good thing because it would discourage them from playing, but I digress.
The most money can be made in markets which have the worst correlation between reality and the market price. There are types of markets on PM which are very far from reality. There are types of markets which are very close to reality. It isn't surprising that sports markets are in the first category.
There are also political markets, where it is clear campaigns manipulate the prices for the same reasons they will publish polls showing they are gaining or ahead. The CA governor market is especially far from reality. This is compounded by the fact that Americans can't trade this market so the distance from reality is especially bad for American election markets.
That being said, that most people don't make money on PM isn't surprising. The same thing is true for most markets. You only invest (business) time into something if you are getting a return. So those that are actually good at making predictions put the time into making trades, so they are the bulk of the trades and the bulk of the profit. Same thing happens with day traders on the equity markets.
> There are types of markets on PM which are very far from reality. There are types of markets which are very close to reality. It isn't surprising that sports markets are in the first category.
I think you're claiming here that sports markets are "very far from reality". What do you mean by that? Scores, injuries, fouls, etc are very well documented and objective things, so I can't figure out what you mean by "far from reality". If anything, these markets seem exceptionally "real", with well defined criteria and outcomes.
What I mean is that people disproportionately bet on their home town team. And they often bet with their hearts and not their heads. But different places have different amounts of gambling and different quality teams. So places that gamble a lot but their local team isn't very good often have lines that are off from what they should be. So a team that might only have a 20% chance of winning a given game might be given a 40-50% chance on PM. Larger betting markets (eg Vegas) tend to not have these gaps as pro betters will take advantage and move the line back to where it should be. That's what I mean.
Oh I see, you're saying the line for sports markets is significantly distorted because there's lots of fans throwing money around unwisely. I guess I just doubt this claim. The pro betters that make money at vegas can just as easily make money on polymarket. In fact in many respects it's even easier. If it's getting so distorted, then this is basically free money, and the pros will eat it up, bringing the line back to where it should be. Additionally, if you personally believe with high confidence that the line is distorted, you have the opportunity to make a lot of money. So the real evidence should be in your behavior -- do you bet on these mispriced markets? How much have you made?
Not OP, but I guess he is saying these (elections, sports) are markets where the participants have their own ideas about how they want them to resolve, and aren’t just markets with neutral participants only.
No PM though and that means the markets have very little liquidity. Also, I think you need to be an accredited investor to do it. Its very new but it is interesting.
I have absolutely zero knowledge about the area, but doesn't Polymarket just set up bets between users?
If you're a regular bookmaker, who is on the hook for any losses, then yes you would ban successful users. But in this case you just skim off a fee for each "trade" so there's no incentive to ban anyone.
It doesn't seem surprising that being a bookmaker in your behavior on sports is a big win since many people bet on identity instead of information in sports and with small bets/attention. It's interesting in that the pattern could have turned out to apply immediately across everything or something.
I always wondered if you could compare odds on the most advanced sports betting apps and those on futures markets and exploit any big diffs between the two.
That makes you a profitable bettor, so your accounts will get restricted. Best way to make money is if you have better predictions then bet on markets like totalisers, betfair etc. not with casinos or bookmakers.
Yes, power laws are everywhere. The exact shape of each distribution varies, however, and little is known empirically about the distribution of trading profits in financial markets.
Yeah if you look at the Boltzmann Wealth Model, where every actor gives away 1 dollar to a random person, and you repeat this, then if you start with an equal wealth distribution, you end up with an exponential wealth distribution. That shows how strong exponential curves are :) A few "lucky" individuals become very wealthy, while the vast majority of people end up with very little or nothing.
The effect is so strong that I'm starting to wonder if we should have laws against power laws, like we have in engineering when we try to make things stable.
I believe a power law acts differently from an exponential distribution. I think wealth distribution is commonly approximated by a Pareto distribution.
In your model, the exponential distribution is caused by the fact that you cannot go below zero; otherwise, it would be a normal distribution.
I don't agree with your opinion about laws against power laws, but that is another matter.
Not in a 'oh the rich don't so they control the media and so we don't' sorta way. But like in a 'lets educate people on the pluses and minuses, debate a while, and then come to an informed conclusion' sorta way.
Like, deep down, does the average person actually want a stable economy? Because it seems to me that there is an even split historically between the folks that want stability and a little patch of land and weekly rhythms, and the folks that just want to drunkenly burn couches in the street every full moon, or some such thing.
Not to be glib here at all. I like, would actually like to know the answer. Sorry if this comes off the cuff seeming.
I have a dumbed down version of this question as variant of the Voight-Kampff test (Bladerunner) that goes like this.
You have 2 choices for how the world is shaped, pick 1:
A. You have a modest but comfortable home, a job that pays you enough so that you have what you need and can afford occasional luxuries (e.g., an annual holiday abroad), have good health insurance, access to education and childcare, etc. Everybody else has the same thing, and because of this you live in communities where the arts flourish because nobody has to worry about becoming homeless or destitute.
B. You live in magnificent mansion, one of dozens you own around the world (accessible via one of your personal Gulfstream jets). You have more money then you could ever spend in a lifetime (even recklessly). Your homes are staffed with obedient servants who cater to your every desire. I mean anything. You own them. Your mansions are on palatial estates with secure walls and guards to keep out the rabble outside -- who fight for scraps and are desperate enough to do any kind of work to keep your factories humming and printing cash.
I wouldn't hesitate to choose A because that's a world I'd love to live in and the world of B horrifies me. I don't say this as virtue signaling, it's my innate reaction.
I think that a significant portion of the population would love to choose B. And in some ways, some already have.
I really hate to call people stupid, but I would actually go ahead and call people who choose option B idiots.
I'm sorry if that offends anyone reading this, you can downvote me out of spite if that makes you feel better.
I say this because I read a while ago (like years) an article in the Economist showing that happiness in a society is correlated with equality - (sorry for the dash I am a human I just happen to use em dashes sometimes) not just amongst the poor, but also for the rich.
You'll note that rich people in highly unequal societies tend to struggle with mental illness more than in equal societies.
Money doesn't buy happiness. Being filthy rich won't heal the hurt in your heart. If you're too stupid too realize that, that's fine, enjoy your suffering, but I'd appreciate you having the honesty to admit that you're a deluded moron instead of trying to create completely false arguments for why the misery you're creating for yourself and others is actually a sign of anything less than pure human stupidity.
I couldn't find the original Economist article, nor the study it cited, but here's a link I found on Google.
I think most people want to earn more the harder they work, and I think that is fine.
However, power laws basically spoil it because it gives a hard worker an exponential advantage, where they can (and will) use that money against other people who made different life choices.
You could go do A right now at a local level. You don't though, because you don't actually want to live that way. It reeks of virtue signaling despite your protest.
Seems like you left out the "millionaire next door." There are a lot of people who want to save up enough money to retire. Some of them want to retire early. This doesn't involve any mansions or extravagant living, but it does mean investing well.
How many people think multiple mansions is a realistic option for them? Not that many, I'd expect.
If you ask people what they want, they'll request some impossible combination of attributes without consideration of any tradeoffs.
They will also try to push all negative externalities on to people wealthier than themselves. Most people see themselves as middle class or lower middle class, even up to relatively high income levels. If you ask each of them where the tax rate should be increased, the answer is usually a few steps higher than their own income.
UBI is a topic where this becomes very obvious. When you explain UBI to most people they assume they will be receiving the UBI and some abstract combination of billionaires and corporations would pay for it. Then you show them the math that it wouldn't work and they start to become less enamored with the idea. (Or lately: They just don't believe you and retreat to their imagined ideal free of pesky economics)
these apps should load with this pie chart showing your likelihood of ever making a profit based on what they know about you. "YOU WILL LOSE MONEY ON THIS APP". Like the cigarette packs.
I don't believe in them because when you consider operational costs, less money comes out of the lottery than goes in, so if everyone simply didn't bet on the lottery, they would have more money than if they bet on it.
at least the lotteries and las vegas publish their odds. Losing to the terrible math is probably better than playing against someone with inside information.
This is (possibly what you’re thinking of) a requirement in the EU for CFD trading providers. Providers have to (somewhat prominently) state in all of their ads what percentage of traders loses money using the product.
In terms of damage to society it's irrelevant who the winners are within the Polymarket system, it matters how much the insiders playing on Polymarket have an effect to the outside world of politics and economics. If Polymarket gambling increases corruption and destructive effects on society it simply has to be regulated or made illegal.
What's the baseline here - in a world where every person is betting randomly X times a month, what would the distribution look like? There'd still be a small percentage that wins most of it, right?
We don't know the exact benchmark, but your insight is correct. We provide a simulation similar to what you have in mind towards the end of the paper, but you can generate almost any distribution you want by fine-tuning a simulation...
To relate it to a more-general economic article that has stuck with me for a while:
> If you simulate this economy, a variant of the yard sale model, you will get a remarkable result: after a large number of transactions, one agent ends up as an “oligarch” holding practically all the wealth of the economy, and the other 999 end up with virtually nothing.
Great paper. Still digesting after a first pass, but it looks really solid.
Quick question: did your team consider the implications of capital recycling on the maker side? Liquidity providers tend to have superior tech and information, so the general edge is expected. However, the ability to effectively reuse the same capital to sell outcome sets seems like it could offer a scale advantage that enables them to capture even more opportunity. On the other side, takers expressing directional views have their capital committed to one position at a time. Do you think this contributes to the gains being so concentrated among them?
Thanks! No, we haven't looked at the capital "locked" in these markets (which is important considering there is no margin trading, at least not yet). Most markets have a short horizon, but some have very long ones. It gets very complicated very quickly because it's not always the case that you open a position and then close it (you get partial fills, users closing partial positions, etc.). Taking that into consideration would make liquidity providers look even better than they do in our study. Not having their capital locked allows liquidity providers to trade more and earn more per trade on average. Trading on margin would allow liquidity takers to lose more money more quickly (this is an educated guess; you never know what the outcome of a new policy would be until you implement it).
The long horizon ones are also interesting on Polymarket because the vast majority don't have APY. As a result, prices should be discounted, but sum-to-1 doesn't allow for it. I'd expect a negative skew to the performance of traders willing to take those inflated prices (relative to what the odds DCF imply they should be). But there's also no upside for makers, so liquidity is pretty thin.
If the prediction markets are between people, why do people bet against the mostly likely outcome at all ?
Real anecdote. For e.g, during Superbowl 2026. The markets were allowed bets to be placed until 6 minutes to close, when Seahawks were way ahead of New England Patriots.
The probablity of Seahawks winning was almost 99% and any person who places a 1000 dollar bet will make 1100 in 6 minutes. Where is the 100 dollar going to come from? Who loses that?
$1000 would return $1010. The money comes from people who want to close their trades early rather than wait for the market to settle. Often times no one actually takes these offers and then it just sits in the order book.
So the market is still being built: Whales come in with educated guesses, use limit orders like responsible adults and take cash home. Daredevils, amateurs and gambling addicts come in, go all-in and try to time the market, which probably never works. %1 -> 76.5% is huge, in terms of Gini coefficient it's like living in Brazil, right?
Because it's not required and not common practice in our field at this stage. But none of us (I'm one of the authors) is affiliated with or has a financial interest in any prediction market platform.
The rules for each contract are provided when you bet, but ultimately there are plenty of markets that are settled in controversial ways and users have little recourse because the sites TOS's often say their rulings are final (this is the same for many sports books as well).
To give an example, I wagered on a market a while ago that Trump would say "Mamdani" before the end of the week. He responded to a question Mamdani where the reporter asked about the mayor by name and Trump said "Mandami" instead of "Mamdani" (switched the m and n). Kalshi ruled that that didn't count as Trump having said the word.
Trump ultimately said Mamdani correctly the next day so it ended up not mattering and I think the rules have since been updated to accept obvious mispronunciations, but I think it's a good example of how much gray area some of these markets can have.
Of course, it's impossible to know for sure what was LLM processed or not, but we're getting complaints about some of your posts and, upon inspection, the complaints seem justified.
I'd be very cautious how matching works. For some markets like sports it's trivial, but many politics or economics markets have minute rule differences that dramatically change what the actual market is betting on. Many markets have identical titles but are actually totally different markets.
I don't think that's surprising because the alternative would be that some people are able to predict the future. Whatever strategy one might figure out that works is long term destined to fail, as other people start using them. The only real way to make money there is by providing liquidity since it's a zero sum game. For the stock market this is not true because it's not zero sum, it grows over time.
Not really. Not all players in prediction markets are rational players. A good chunk of it are there for entertainment, and analyze things incorrectly; you can take the other side of those trades, and you won't need to predict the future.
There are some bets on prediction markets where the future is either already known or in the control of people who may be participating in the market. For example, when people bet on how long the next presidential briefing will be, it doesn't take a prophet to predict this, anyone who organizes said briefing can control it (at least with a very high probability).
So, the question becomes "what is the preponderence of such bets" and "how many people with control or knowledge of bet outcomes actually participate in the market" - not "can some people see the future of any bet better than others".
My point was that the alternative to "liquidity providers make the most money" is not "prophets exist", the truth could have been "insiders make the most money".
Note that there is nothing in the rules of Polymarket or the other prediction markets that says it's not perfectly OK for insiders to bet, so I don't think it makes sense to call this cheating. Of course, this is a major absurdity of these "markets", but insiders are part of the game you chose to play by participating.
Yes, but the alternative (that some people are very good at forecasting) is also plausible. It's also useful to have a good prediction model and timely data sources when providing liquidity. We also find that some of the "biggest losers" also provide liquidity; they just aren't as good at it.
I don't know. Buffett had a good example of, if you organized a national coin flipping contest in the US, you would have people that won 25+ coin tosses in a row. Are these people good at calling coin tosses or is it just chance? You cannot reliably and long term predict if Bitcoin will go up or down within 5 minutes, or something similar. You can cheat maybe somehow, but that's not within the rules of the game.
That's true, but you can invest in your infrastructure and data sources to be faster than most traders, which allows you to provide liquidity with a smaller spread (and snipe the slower traders that try to provide liquidity)
The stock market is arguably zero sum as well, just that directionally betting on the US has generally worked during the golden years of the US economy.
The stock markets of the world aren't a money printer.
There is only so much real money in the world, and that is determined by the Treasuries and Feds of the world. There are only so many dollars that were ever created, so many Japanese yen that were ever created, and so many Turkish lira that were ever created.
The stock market is a wealth redistribution mechanism, not a money printer. Market caps going up are not equal to money being created. It's not like the shareholders could collectively cash out all of that market cap and spend it. If everyone sold all of their stocks and pulled fully out of the stock market until everything crashed to $0, everyone's cash would still sum to whatever the government printed.
Although the stock market isn´t in itself, it benefits from the second order effects of continuous money supply expansion, and long term processes progressively concentrating money into the financial system.
Sorry, but that is wrong or confused on multiple levels. You claim that a) "real money" (whatever that is) is determined by how much money central banks supply, and b) the stock market is a redistribution mechanism, not a wealth creation mechanism. In reality, the stock market creates wealth, and central banks control the nominal quantity of money (not "real money"), thus influencing inflation and shifting around real wealth (between creditors and debtors).
The entire point of the stock market is to support an economy that creates value: take inputs that are worth X (basically, cost of goods sold) and combine them into something that is worth more than X (revenue), with the difference being a profit that (after interest, taxes, depreciations) is paid out to stockholders as dividends. That is positive sum.
The market cap of a firm is the best estimate of the discounted value of future earnings. When it goes up, that does represent (estimated) value creation.
Stocks have a fundamental value. Everyone would not "collectively cash out" - stock prices would fall well below their fundamental value, others would see a bargain, and buy the stock. (Unlike crypto, say, which has no fundamental value but is purely sentiment; well that plus supporting the underground economy.)
Of course, it is conceivable that something happens (nuclear war, say) that would reduce company earnings for the foreseeable future, and then the stock market would collapse. But that is because it correctly anticipates reduced future earnings, not because "everyone collectively cashed out". If everyone is wrong about the stockmarket, but you are right, you can realise your gain over time. Just hold on to the stock and wait for the dividends to roll in.
So, the economy is positive sum, the stock market is a wealth creation machine (refuting your b).
Next, on money. My entire discussion above was purely in real terms. Yes, central banks determine the money supply (commercial banks create most money, but central banks control it). But they don't determine how much real wealth is produced every year; rather, they try to control the money supply so as to achieve moderate inflation.
By creating more or less inflation the central banks achieve some redistribution of wealth from debtors to creditors or vice versa, but again, they do not influence real wealth creation (unless inflation becomes so extreme (either deflation or hyperinflation) that it affects consumer behaviour, degrades planning, etc.).
Take a look at the user's history, it's more obvious in context. It has a lot of claude-specific tells which are noticeable if you've spent time working with claude. AI-generated comments are against the HN guidelines https://news.ycombinator.com/newsguidelines.html#generated
it's only "better than human comments" if you have no idea what profitable trading looks like. it's a very-very thin mildly convincing veneer over what is fundamentally slop.
Full dataset available at https://huggingface.co/datasets/vgregoire/polymarket-users