Prediction Markets Get More Professional, and Harder to Beat

An academic working paper analyzing $13.76 billion of trades on Polymarket found that roughly 27% of dollar profits were captured by just 3% of accounts considered "persistently skilled." Those accounts repeatedly moved market prices toward outcomes that eventually occurred.

The skilled accounts earned consistent profits by reacting more quickly to publicly available news, arbitraging inconsistent pricing across related contracts and trading against behavioral errors, the paper found. As more institutions chase the same discrepancies, prices adjust faster and the available edge becomes scarcer.

"If you have a lot of skilled people, then they compete, and in doing so, they make prices more correct," said Theis Jensen, a Yale economist and co-author of the paper.

That means strategies relying on wide spreads and straightforward arbitrage across related contracts may find it harder to profit.

"It's harder as markets get more efficient and spreads get tighter. It's going to be harder to find these mispricing and arbitrage opportunities," Julie Hoover, a Bank of America equity research analyst, told CNBC.

Jensen expects the share of traders considered to have an edge to shrink from 3% to potentially below 1% as competition intensifies.

"I think it's only going to be the very, very best — say hedge funds — that are able to beat prediction markets," he said.

Hoover said smaller skilled traders could still retain an edge in niche markets, because the breadth of contracts lets traders develop specialized expertise and even become market makers. Large institutions face scale constraints in thin markets; Jensen said relatively small orders can move prices enough to "evaporate the institution's own edge," making large firms less likely to enter lower-liquidity markets where specialists may keep an advantage.

Participants without a persistent edge may benefit from more sophisticated competition through better pricing. Better-calibrated prices reduce the risk that they repeatedly overpay by taking the wrong side of pricing errors.

"In an efficient market, it's harder to make mistakes consistently," Jensen said.

He said the maturation of prediction markets could make them more of a "fair gamble": participants may still lose on any individual contract, and frequent traders remain likely to lose after transaction costs, but quoted prices should more closely reflect the risks they are taking.

Professionalization is a mixed bag for users but a clear benefit for platforms. Greater institutional trading volume can expand transaction fee opportunities, while better-calibrated prices can strengthen the appeal of event contracts as hedging, forecasting and market-data tools.

Prediction markets are already viewed by many as reliable. Federal Reserve researchers found that Kalshi's macroeconomic contracts matched or in some cases outperformed conventional forecasting benchmarks: its headline CPI forecast outperformed the Bloomberg consensus, while its core CPI and unemployment forecasts performed on par with the market data institution.

"Everyone will start referencing the data, and then people will start trading the data," Hoover said.

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