Rhody Trader

Roger at Random Roger posted a question he received that basically asked him whether he believed in efficient markets. That question went:

Do you believe that the markets have priced all known public knowledge and that it is quite challenging to forecast the future?

Actually, the parts about pricing in all known public knowledge and forecasting the future are seperate things. In-efficient markets aren’t necessarily easy to forecast, after all. But I want to comment on the first bit.

I have the advantage of watching the markets all day long.

Then again, maybe that’s a disadvantage. I’ll leave that up to the reader to decided.

Anyway, doing my daily forex market analyst work I get to see how the market reacts to data. The one thing that is very clear to me is that the distribution of and reaction to new information is nothing close to instantaneous. I have seen over and over again some meaningful news item come out and it take considerable time for the market to react. And of course sometimes the market hyper-reacts. Traders do not all get the information instantly, and most definitely do not react to that new data instantly. It takes time for things to filter through.

The forex market is a perfect example. If data comes out during US market hours when Asian traders are sleeping, when are they going to react to that information and make it market of their analysis and/or trading? Not until some point many hours after its release.

The other thing I would toss in is this. Not everyone who will trade based on a certain bit of information will even look at that info until well after the fact because they were not immediately focused on the market in question. A perfect example is someone who trades the stock market and periodically looks for new stocks to play. They might have a stock come through their screener and they go back to do the fundamental analysis. It’s only at that point that they are incorporating prior information into their analysis.

This is a big part of why from the time I first heard of the Efficient Market Hypothesis I thought it was a crock.

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