An LED sphere screen shows information inside the new location of the prediction market online platform Polymarket called The Situation Room, during its opening day in Washington in late March.THEO MARIE-COURTOIS/AFP/Getty Images
Prediction markets sweeping the retail trading scene are being dominated by sophisticated users who capture nearly all of the profits, leaving most retail participants on the losing side.
A working paper published in early April that analyzed trades on the popular U.S.-based prediction market platform Polymarket found that about 71 per cent of users lose money, while a small group of skilled traders reap more than 80 per cent of all gains.
The paper analyzed more than 1.4 million users and US$20-billion in volume across 70 million trades on Polymarket between 2022 and 2025. The research was conducted by scholars from HEC Montréal, the University of Toronto and ESSEC Business School in Cergy, France.
“Unless you’re very lucky or extremely good at forecasting, your expectation of making money is zero,” said Charles Martineau, an author of the paper and an associate professor of finance at the University of Toronto.
Prediction markets – in which users trade on the outcome of events, from elections to economic data – have surged in popularity in the United States in recent years, particularly among younger users, driven by platforms such as Kalshi and Polymarket. The sector has been met with scrutiny in the U.S., where lawmakers and regulators are debating whether these products resemble gambling.
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In Canada, prediction trading products have largely been off limits, although regulators have recently begun allowing limited offerings.
A typical contract poses a yes-or-no question, such as whether the Bank of Canada will raise interest rates on a certain date. Prices fluctuate based on what contracts other traders put money on. If a “yes” contract is trading at 30 cents, that usually implies a 30-per-cent chance of the event occurring. If the prediction is correct, the contract pays out $1; if not, it expires worthless.
The study found that profits in prediction trading are heavily concentrated. The top 1 per cent of users capture about 84 per cent of all gains, while the top 0.1 per cent capture nearly 60 per cent. In effect, most participants lose money to a small group of sophisticated traders, the study found.
A component of traders who profited from prediction trading were “market makers” – they place trades that provide liquidity rather than simply accepting existing prices, said Pat Akey, one of the paper’s authors. Mr. Akey, a McGill graduate, is a U.S. scholar who currently works as an associate professor at ESSEC Business School.
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The findings also suggest that successful traders tend to identify mispriced contracts – for example, buying a contract at 30 cents when its true value is closer to 45 cents – and consistently act on those opportunities, Mr. Martineau said. But he acknowledges that some of these people are just lucky.
The study highlights clear patterns among losing traders. Users who bet on long-shot outcomes and trade more frequently are more likely to lose money.
The average user places about 63 per cent of their trades at extreme prices, the study found, where these long-shot bets tend to be most costly.
Another key finding is that prices in prediction markets are generally accurate. A contract priced at 70 cents tends to occur about 70 per cent of the time, suggesting the market as a whole is effective at aggregating information. But that efficiency also makes it difficult for individuals to consistently outperform, the study found.
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In Canada, the sector is in its early innings. In March, The Globe and Mail reported that Toronto-based Wealthsimple received approval from the Canadian Investment Regulatory Organization to offer so-called forecast contracts, becoming one of the first firms allowed to bring them to retail investors.
The approval is limited to contracts tied to economic indicators, financial markets and climate trends – not sports or elections, which are among the most popular uses in the U.S.
Advocates of prediction market trading say that these trades can be used to hedge against economic risks that are otherwise difficult to manage. Even so, the structure of prediction markets differs from traditional investing, researchers say.
“Our paper sheds light on the fact that a retail investor cannot just put money in prediction markets and have an expectation of making a profit, unlike in equity markets,” said Nicolas Harvie, a PhD student at the University of Toronto and a co-author of the study.