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Settlement Manipulation in Prediction Markets

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  • David Dai
  • Ruizhe Jia
  • Shihao Yu

Abstract

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.

Suggested Citation

  • David Dai & Ruizhe Jia & Shihao Yu, 2026. "Settlement Manipulation in Prediction Markets," Papers 2606.31675, arXiv.org.
    • Handle: RePEc:arx:papers:2606.31675
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    File URL: https://arxiv.org/pdf/2606.31675
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