Settlement Manipulation in Prediction Markets

Authors
David Dai
Stanford University

Ruizhe Jia
Stanford University

Shihao Yu
Singapore Management University - Lee Kong Chian School of Business

Date Written: June 30, 2026

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.

Keywords: Settlement Manipulation, Prediction Market, Market Liquidity, Price Discovery

JEL Classification: G14

Suggested Citation:

Dai, David and JIA, RUIZHE and Yu, Shihao, Settlement Manipulation in Prediction Markets (June 30, 2026). Available at SSRN: https://ssrn.com/abstract=7028398 or http://dx.doi.org/10.2139/ssrn.7028398