efficient markets hypothesis

  • 14 Sep 2012 at 3:01 PM

NYSE Fined For Selling Product That Was Too Good

The standard illustration of the efficient markets hypothesis is the thing about the economists and the $20 bill on the ground, but it is so old and stale at this point that Matt Yglesias had to invent a new version this week, and it’s something like “if you find a penis-enlarging injection on the ground, don’t pick it up, because if a penis-enlarging injection actually existed then Pfizer would already have picked it up, and so this one will kill you of exploding penis, QED.” You could take this advice overly literally as an argument against all human effort, and perhaps you should, but in fact someone didn’t take it literally enough, or at all, and so died of exploding penis.

“If it works someone’s getting paid for it” of course doesn’t imply the converse “if someone’s getting paid for it it works” – particularly not in the penile-enlargement field – and I suppose neither does EMH; if anything it just implies “nothing works and nobody gets paid.” Still, there is at least some weak intuitive support for the belief that if lots of sophisticated financial market participants pay for something, they’re getting some value back in return.

Why is the SEC mad at the New York Stock Exchange? I am puzzled; the SEC’s quotes on the matter seem to be refutable on first principles. Here is Robert Khuzami in the SEC’s press release:

“Improper early access to market data, even measured in milliseconds, can in today’s markets be a real and substantial advantage that disproportionately disadvantages retail and long-term investors,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “That is why SEC rules mandate that exchanges give the public fair access to basic market data. Compliance with these rules is especially important given exchanges’ for-profit business interests”

And here is Sanjay Wadhwa to Bloomberg: Read more »

  • 05 Oct 2011 at 12:27 PM

Efficient Markets News Of The Day

We live in a golden age of information dissemination and stock liquidity, in which news moves faster than earthquakes and high-frequency-trading robots can trade faster than you can blink, meaning that the next time there’s an earthquake your 401k will have bought construction stocks and Twitter even before you stop shaking.

But we’re also living in a golden age of misinformation, where you can find someone to publish pretty much any rumor you want, and those rumors can move markets up or down instantly. And for some reason the robots who’ve been put in charge of markets seem to be not dispassionate calculating machines but rather touchy C-3PO types, and can exacerbate the speed and severity of crashes with their hypersensitivity. But the upside should be that the recovery from millisecond crashes should be similarly quick – once misinformation is corrected, the robots should dry their tears, blow their noses, and bid prices back up in a few more milliseconds.

Maybe not so much. Three New York Fed researchers looked at a particularly silly case:
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