quant research // summarizing the paperLOADING
David Dai, Ruizhe Jia, Shihao Yu · 2026-06-30
The paper studies prediction-market contracts that settle on an underlying asset price, showing theoretically and empirically that traders can profit by trading the underlying near settlement to move the payout. After Polymarket launched a five-minute Bitcoin contract, spot order flow spiked around settlement and prices reversed sharply afterward, with manipulators capturing profits largely at the expense of retail liquidity traders. Longer, fifteen-minute contracts showed little such manipulation.
Why it matters: Traders in short-horizon, price-settled prediction markets (and in the underlying spot market around those settlement windows) should be aware that settlement-time order flow can be distorted and prices can reverse afterward. The finding suggests caution about being on the losing side of manipulation, and highlights that contract design (horizon length) materially affects vulnerability.
⚠ Evidence is specific to Polymarket Bitcoin contracts and a stylized model, so it may not generalize to other markets or persist as designs change.
Prediction markets increasingly list contracts settling on an asset price that holders can move by trading the underlying. We build a model showing that such contracts transfer wealth from prediction-market liquidity traders to manipulators and harm price discovery in the underlying, even as it becomes more liquid. After the launch of Polymarket's five-minute Bitcoin contract, settlement-time spot order flow spikes, causing large price reversals after settlement. Manipulators capture a large amount of profit, mostly from retail. Manipulation is largely absent in the fifteen-minute contracts: lengthening the contract horizon removes it, providing the market-design remedy our model and evidence support.
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AI summary generated from the paper’s public abstract via arXiv; it may miss nuance — read the source before relying on it. Thank you to arXiv for its open-access interoperability; StockTools is not affiliated with arXiv, and all rights remain with the authors. Educational only, not financial advice.