4 ms·

But people who trade against fundamentals aren't trading directly against future profits, they are just betting on long term price movements. HFT traders are b

But people who trade against fundamentals aren't trading directly against future profits, they are just betting on long term price movements. HFT traders are betting on (very) short term price movements. According to the theory that stock prices are a martingale (which is well established), there is no qualitative difference between long and short run price movements. In particular, there is no reversion to the mean in stock prices [0]. [0] Of course, there are going to be literally hundreds of papers exhibiting some reversion to the mean effect. But this effect is always tiny.

vasilipupkin 11y ago
yeah, in fact any long term movement is mathematically a sum of short term movements :) so if your goal is to predict a long term movement, there is really no contradiction between using both long term and short term predictions to trade
- JesperRavn 11y ago
  Yes, but being a martingale implies something stronger, which is that both short and long term traders are betting on the fundamentals to exactly the same extent.
cynicalkane 11y ago
"In particular, there is no reversion to the mean... there are going to be literally hundreds of papers exhibiting some reversion to the mean effect." Okay. I also think you don't know what a martingale is. It is impossible to make any expected value betting on martingale movements, by definition. If you believe traders are purely "betting on price movements" of martingales then profit is impossible. So either prices aren't martingales or trading is not purely a process of betting on the movements of market-clearing prices. Actually, both assumptions are false.
- JesperRavn 11y ago
  If you knew anything about academia, or if you even bothered to carefully read my post instead of nitpicking, you would understand that just because something is in general true, doesn't mean that there won't be hundreds of papers showing how this thing fails to be true in special cases, or to a very small extent. Regarding martingales, a martingale is defined relative to an information set (you know what a martingale is so you already knew that, right?). Saying that there is no reversion to the mean implies being a martingale with respect to the weakest possible information set (the history of prices). Traders, whether high frequency or others, may have extra information outside this information set. In short, stop nitpicking and revise your understanding of what a martingale is.

vasilipupkin 11y ago

yeah, in fact any long term movement is mathematically a sum of short term movements :) so if your goal is to predict a long term movement, there is really no contradiction between using both long term and short term predictions to trade

JesperRavn 11y ago
Yes, but being a martingale implies something stronger, which is that both short and long term traders are betting on the fundamentals to exactly the same extent.

cynicalkane 11y ago

"In particular, there is no reversion to the mean... there are going to be literally hundreds of papers exhibiting some reversion to the mean effect." Okay. I also think you don't know what a martingale is. It is impossible to make any expected value betting on martingale movements, by definition. If you believe traders are purely "betting on price movements" of martingales then profit is impossible. So either prices aren't martingales or trading is not purely a process of betting on the movements of market-clearing prices. Actually, both assumptions are false.

JesperRavn 11y ago
If you knew anything about academia, or if you even bothered to carefully read my post instead of nitpicking, you would understand that just because something is in general true, doesn't mean that there won't be hundreds of papers showing how this thing fails to be true in special cases, or to a very small extent. Regarding martingales, a martingale is defined relative to an information set (you know what a martingale is so you already knew that, right?). Saying that there is no reversion to the mean implies being a martingale with respect to the weakest possible information set (the history of prices). Traders, whether high frequency or others, may have extra information outside this information set. In short, stop nitpicking and revise your understanding of what a martingale is.