Prediction markets are drawing deeper professional liquidity and institutional volume. However, academic research shows that elite, persistently skilled traders capture a portion of profits, leaving smaller participants facing tougher competition and scarcer arbitrage opportunities.
What started as secondary markets designed to invite everyday people to take and trade bets on future political events have matured into financial ecosystems. Platforms like Kalshi and Polymarket are being courted by Wall Street. This professionalization is shifting trading dynamics.
According to an academic working paper analyzing $13.76 billion of Polymarket trades analyzed roughly 27% of dollar profits captured by just 3% of accounts identified as persistently skilled,
meaning they repeatedly pushed market prices toward outcomes that eventually occurred.
Professionalization and the Shrinking Edge for Traders
Skilled accounts have earned consistent profits by reacting swiftly to public news, arbitraging inconsistent pricing across related contracts, and trading against behavioral errors. But as more institutional players chase those same discrepancies, prices adjust faster and the available edge grows scarcer.
That increased efficiency means strategies relying on wide spreads and straightforward arbitrage will find it increasingly difficult to turn a profit.
Jensen expects the proportion of traders holding a persistent edge to shrink from 3% down to potentially below 1% as competition intensifies as institutional competition intensifies. He noted that it will likely take elite entities, such as hedge funds, to consistently beat prediction markets.
At the same time, large institutions face scale constraints in thin markets. Relatively modest orders can move prices enough to evaporate the institution’s own edge,
according to Jensen, which deters large firms from entering lower-liquidity markets where specialists maintain an advantage. Hoover added that smaller skilled traders can still retain an edge in niche markets by developing deep, specialized expertise across the vast breadth of available contracts.
Macroeconomic Forecasting and Federal Reserve Benchmarks
Beyond political wagers, prediction markets are increasingly valued for macroeconomic forecasting. Researchers at the Federal Reserve found that Kalshi’s macroeconomic contracts frequently matched or outperformed conventional forecasting benchmarks.
That data reliability has turned prediction markets into data sources for mainstream news organizations. Major media outlets have established arrangements with platforms like Kalshi and Polymarket to display betting odds as data tickers alongside election poll results. According to Subramaniam Vincent, director of journalism and media ethics at the Markkula Center for Applied Ethics at Santa Clara University, these arrangements involve financial compensation that functions essentially as paid sourcing or brand placement media ethics analysis on prediction market partnerships, allowing platforms to legitimize their products and expand their user bases through mainstream channels.
Regulatory Fragmentation and Legal Battles in the U.S.
While European regulators have largely agreed that prediction markets constitute gambling—leading to outright bans or geoblocks in many European nations—the regulatory landscape in the United States remains fractured. Over a dozen U.S. states have filed lawsuits against prediction platforms on gambling grounds, with Arizona even bringing a criminal case against Kalshi. Meanwhile, the Commodity Futures Trading Commission (CFTC) has stepped in to defend the platforms and preempt state jurisdiction U.S. regulatory and legal disputes.
This federal-state power struggle unfolds against a backdrop of political connections and market integrity scandals. Donald Trump Jr. is connected with both Kalshi and Polymarket, and there are reports the Trump organization plans to launch its own prediction platform. Concurrently, episodes involving suspicion of or prosecution for insider trading—such as bets on Maduro’s capture and the Iran war—have triggered regulatory scrutiny and attempts by betting actors to pressure journalists.
Integrity Enforcement and Internal Media Restrictions
The convergence of private knowledge, financial incentives, and political forecasting has forced institutional reckonings inside newsrooms as well. ProPublica recently barred its journalists from participating in prediction markets to prevent conflicts of interest arising from private reporting knowledge newsroom policy changes regarding staff participation.
