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The efficient market hypothesis is that markets are efficient to present public information. If markets were efficient to the present value of the future price

The efficient market hypothesis is that markets are efficient to present public information. If markets were efficient to the present value of the future price at all times, then there would be no such thing as insider trading and hedge funds would all lose money. You can make money by making inferences about present facts, or taking views on future occurrences.

martinpw 7y ago
I'm not clear why you mention insider trading here? Insiders have access to information that is not present public information, and so is not priced into the current value of the stock.
- thoughtstheseus 7y ago
  The the strong form of the EMH includes inside info, all info in existence.
  - kpommerenke 7y ago
    Yes, but no one claims that the market is strong form efficient. The question is rather whether the U.S. stock and bond markets are weak form (prices include all past trading data) or semi-strong form efficient (prices include all publicly available information).
greenshackle2 7y ago
Exploiting inefficiencies for gains is the mechanism by which EMH is supposed to work, so you're right that some people must be making money by trading intelligently. But professionals have advantages that are difficult to match for small-time investors like: single-digit millisecond latency with exchanges, specialized hardware, sophisticated back-testing systems, proprietary data sources (market data, weather, retail data, etc. any data source you can thing of, some hedge fund is buying it), 60+ hours a week to work on their strats, qualified peers to bounce ideas, volume-discounted broker fees, etc. Even then, professionals beat the market pretty inconsistently. Many people, including professionals, mistake luck for skill. So I think skepticism is justified when people online claim to have strategies that beat the market. If you are one of the few who can actually consistently come up with strategies that beat the market, unless you are already rich, it might be worthwhile to work at a hedge fund and take a cut of the profits from trading large sums of other people's money instead of trading your own.
- totalZero 7y ago
  You can't say there are inefficiencies for institutions to exploit, but no inefficiencies for anyone else. Choose a consistent framework for how you view markets. There are fast alphas, and there are slow alphas. If you're an institution making markets on index ETFs, you can make money by having more accurate spot prices for the basket. Fast alpha. If you're a vol trader, you are more worried about convexity of gap moves and the shape of the vol surface. For me, this means following the story of the name and thinking about where the vol surface doesn't properly reflect tail risk. Slow alpha.
  - kpommerenke 7y ago
    Well, there are (small) inefficiencies for everyone to exploit. For example, a stock is mispriced and you expect it to return an additional 1% when the mispricing disappears. The difference between an institutional investor and a retail investor is that the institutional investor can invest $100 million in the stock and make $1 million of profit, while a retail investor with $100,000 will make only $1,000. As a result, institutional investors can afford to spend a lot more money on research, hardware, data, etc. It's very hard to compete with that as a retail investor.
  - greenshackle2 7y ago
    Good thing I didn't say that, then! I just assign very low prior probability that "this hobbyist investor I've just met on the internet can beat the market" is true. Not zero, but low. And I think it's a pretty well justified prior. As a corollary to that, I don't think it's good advice to tell the average retail investor to try their hand at trading because most of the time it will not work out. If you have managed to do it, more power to you. The advantages I mentioned was what I saw at a not particularly large hedge fund with short to medium term trading strategies. They didn't do just market making, hedge funds do vol trading too.

martinpw 7y ago

I'm not clear why you mention insider trading here? Insiders have access to information that is not present public information, and so is not priced into the current value of the stock.

thoughtstheseus 7y ago
The the strong form of the EMH includes inside info, all info in existence.
- kpommerenke 7y ago
  Yes, but no one claims that the market is strong form efficient. The question is rather whether the U.S. stock and bond markets are weak form (prices include all past trading data) or semi-strong form efficient (prices include all publicly available information).

greenshackle2 7y ago

Exploiting inefficiencies for gains is the mechanism by which EMH is supposed to work, so you're right that some people must be making money by trading intelligently. But professionals have advantages that are difficult to match for small-time investors like: single-digit millisecond latency with exchanges, specialized hardware, sophisticated back-testing systems, proprietary data sources (market data, weather, retail data, etc. any data source you can thing of, some hedge fund is buying it), 60+ hours a week to work on their strats, qualified peers to bounce ideas, volume-discounted broker fees, etc. Even then, professionals beat the market pretty inconsistently. Many people, including professionals, mistake luck for skill. So I think skepticism is justified when people online claim to have strategies that beat the market. If you are one of the few who can actually consistently come up with strategies that beat the market, unless you are already rich, it might be worthwhile to work at a hedge fund and take a cut of the profits from trading large sums of other people's money instead of trading your own.

totalZero 7y ago
You can't say there are inefficiencies for institutions to exploit, but no inefficiencies for anyone else. Choose a consistent framework for how you view markets. There are fast alphas, and there are slow alphas. If you're an institution making markets on index ETFs, you can make money by having more accurate spot prices for the basket. Fast alpha. If you're a vol trader, you are more worried about convexity of gap moves and the shape of the vol surface. For me, this means following the story of the name and thinking about where the vol surface doesn't properly reflect tail risk. Slow alpha.
- kpommerenke 7y ago
  Well, there are (small) inefficiencies for everyone to exploit. For example, a stock is mispriced and you expect it to return an additional 1% when the mispricing disappears. The difference between an institutional investor and a retail investor is that the institutional investor can invest $100 million in the stock and make $1 million of profit, while a retail investor with $100,000 will make only $1,000. As a result, institutional investors can afford to spend a lot more money on research, hardware, data, etc. It's very hard to compete with that as a retail investor.
- greenshackle2 7y ago
  Good thing I didn't say that, then! I just assign very low prior probability that "this hobbyist investor I've just met on the internet can beat the market" is true. Not zero, but low. And I think it's a pretty well justified prior. As a corollary to that, I don't think it's good advice to tell the average retail investor to try their hand at trading because most of the time it will not work out. If you have managed to do it, more power to you. The advantages I mentioned was what I saw at a not particularly large hedge fund with short to medium term trading strategies. They didn't do just market making, hedge funds do vol trading too.