9 ms·

This is such a confident statement, and I don't mean that as a compliment. For starters, is the evidence behind this Hayekian market efficiency really so stron

by HSO 7y ago

This is such a confident statement, and I don't mean that as a compliment. For starters, is the evidence behind this Hayekian market efficiency really so strong as to warrant this kind of absolute confidence in the wisdom of markets? > markets work by polling the expertise of many different parties who all understand a piece of how things should be valued. …as well as orders of magnitude more people who do not understand how things should be valued. → noise, which is fine ("excess volatility"), but which can also become highly persistent in the presence of correlated expectations ("bubbles") > This results in millions, if not billions, of interconnected price-discovery feedback loops. Well, there are negative and positive feedback loops, only one of which is stabilizing! > beneficial […] because the price discovery feedback loops get faster This can also backfire. In fact, this is why a number of stock markets have instituted a trading stop if an asset moves "too fast". Slowing things down / reducing liquidity can stabilize a situation. Actually, this reminds me of [1] W. A. Brock, C. H. Hommes, and F. O. Wagener. More hedging instruments may destabilize markets. Journal of Economic Dynamics and Control, 33:1912–1928, 2009. where you have a similar counterintuitive argument. The history of the idea of market efficiency is long and the idea remains controversial or contested. See e.g. Philip Mirowski's writings.

1e-9 7y ago
You misread my post. I never said the markets were efficient. On the contrary, they are generally far from it. What I said was that the markets combine the efforts of many different entities in order to determine prices in a way that is superior to what any one entity could do. > Well, there are negative and positive feedback loops, only one of which is stabilizing! Absolutely. Entities that consistently contribute positive feedback cause harm to markets and they are generally doing something that is either prohibited or foolish. I don't consider either a good long term profit strategy. The market regulation departments work to remove one and large losses tend to remove the other. > This can also backfire. In fact, this is why a number of stock markets have instituted a trading stop if an asset moves "too fast". Slowing things down / reducing liquidity can stabilize a situation. Sure, exchanges use a variety of market integrity controls, including limits on rapid and/or large price changes that can trigger order rejections or trading halts. These controls can be beneficial when the price fluctuation was due to poor trading, but can be damaging to a market when the fluctuation was due to significant new information or because there is a natural high volatility situation such as a derivative that is about to expire or is rarely traded. Consequently, the exchanges have to be careful about how and when halts are invoked. Some exchanges often get it wrong. The main point I was making is that lowering the latency of the multitude of price discovery feedback loops making up the global market can be very beneficial because it allows the pricing dependencies to be more fully determined.

by HSO 7y ago

1e-9 7y ago

You misread my post. I never said the markets were efficient. On the contrary, they are generally far from it. What I said was that the markets combine the efforts of many different entities in order to determine prices in a way that is superior to what any one entity could do. > Well, there are negative and positive feedback loops, only one of which is stabilizing! Absolutely. Entities that consistently contribute positive feedback cause harm to markets and they are generally doing something that is either prohibited or foolish. I don't consider either a good long term profit strategy. The market regulation departments work to remove one and large losses tend to remove the other. > This can also backfire. In fact, this is why a number of stock markets have instituted a trading stop if an asset moves "too fast". Slowing things down / reducing liquidity can stabilize a situation. Sure, exchanges use a variety of market integrity controls, including limits on rapid and/or large price changes that can trigger order rejections or trading halts. These controls can be beneficial when the price fluctuation was due to poor trading, but can be damaging to a market when the fluctuation was due to significant new information or because there is a natural high volatility situation such as a derivative that is about to expire or is rarely traded. Consequently, the exchanges have to be careful about how and when halts are invoked. Some exchanges often get it wrong. The main point I was making is that lowering the latency of the multitude of price discovery feedback loops making up the global market can be very beneficial because it allows the pricing dependencies to be more fully determined.