Professionalization of Prediction Markets Narrowing Retail Edge, Boosting Institutional Participation

WASHINGTON, D.C. – A Polymarket media exhibit at their pop-up experience launch shows data relating to potential political candidates popularity on March 20, 2026 in Washington, D.C. (Photo by Alex Kent/The Washington Post via Getty Images)

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Prediction‑market platforms are actively courting Wall Street to tap deeper professional liquidity, a move that intensifies competition and makes it increasingly difficult for many retail traders to earn profits.

A recent academic working paper analyzing $13.76 billion in Polymarket trades found that roughly 27 % of dollar gains were captured by just 3 % of accounts that consistently applied skill. These “persistently skilled” traders earned steady returns by reacting quickly to public news, arbitraging price inconsistencies across related contracts, and countering behavioral biases. As more institutions chase the same discrepancies, however, prices adjust faster and the available edge shrinks.

“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 study.

This dynamic tightens spreads and diminishes straightforward arbitrage opportunities. “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,” said Julie Hoover, a Bank of America equity research analyst.

Jensen expects the share of traders with a genuine edge to fall from 3 % to potentially below 1 % as competition deepens. “I think it’s only going to be the very, very best — say hedge funds — that are able to beat prediction markets,” he noted.

Hoover added that smaller, skilled traders can still retain an advantage in niche markets. The breadth of available contracts allows for highly specialized expertise, and in less liquid segments even enables them to act as market makers. Large institutions, meanwhile, face scale constraints: a relatively modest order can move prices enough to “evaporate the institution’s own edge,” making them less likely to enter thin markets where specialists thrive.

Polymarket advertisements in a subway station in New York, US, on Thursday, Feb. 5, 2026. Kalshi and Polymarket, which have been assailed by critics for encouraging financial risk taking by making betting more accessible, are now using the promise of free groceries to win over New Yorkers. Photographer: Michael Nagle/Bloomberg via Getty Images

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Ironically, participants without a persistent edge may benefit from the improved competition: better‑calibrated prices reduce the likelihood of repeatedly overpaying on unfavorable contracts.

“In an efficient market, it’s harder to make mistakes consistently,” Jensen observed. He described the maturing prediction markets as a “fair gamble,” where quoted prices more closely reflect true risk, even though most frequent traders are still likely to lose after transaction costs.

For the platforms, professionalization brings clear upside. Greater institutional trading volume expands transaction‑fee opportunities, while sharper pricing strengthens the appeal of event contracts as tools for hedging, forecasting, and market‑data analysis.

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Kalshi matches Bloomberg forecasts, beat on headline CPI

Federal Reserve Board

Prediction markets are already seen by many as reliable. Federal Reserve researchers found that Kalshi’s macroeconomic contracts matched or, in some cases, even 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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