June 26, 2013

The Efficient Market Hypothesis and Surveillance

Back in B-School, we finance majors were taught that the Efficient Markets Hypothesis showed you can't beat the market in the long run. From Wikipedia:
Eugene Fama identified three levels of market efficiency: 
1. Weak-form efficiency
Prices of the securities instantly and fully reflect all information of the past prices. This means future price movements cannot be predicted by using past prices. It is simply to say that, past data on stock prices are of no use in predicting future stock price changes. Everything is random. In this kind of market, should simply use a "buy-and-hold" strategy. 
2. Semi-strong efficiency
Asset prices fully reflect all of the publicly available information. Therefore, only investors with additional inside information could have advantage on the market. Any price anomalies are quickly found out and the stock market adjusts. 
3. Strong-form efficiency
Asset prices fully reflect all of the public and inside information available. Therefore, no one can have advantage on the market in predicting prices since there is no data that would provide any additional value to the investors.

Most of the finance profs believed in #2, it seemed. And yet, the starting salaries for new MBAs on Wall Street were about $45,000, while run of the mill MBA jobs started at $30,000. But, the Wall Street premium had been narrowing in recent years of low prices and stagnant trading volumes and the growth of low commission mutual funds. So, the notion that Wall Street was becoming efficient and thus less inordinately profitable seemed plausible.

Then, in August 1982 that all changed when the Fed goosed the money supply and the Long Boom (mostly for Wall Street) began.

Still, perhaps it's worth taking seriously the logic of Semi-Strong Efficiency: "Therefore, only investors with additional inside information could have advantage on the market." Lots of Wall Street guys have made outsized profits over the last 31 years. Maybe some of them had inside information, just as the EMH would imply? Maybe the growth of surveillance had something to do with it?

After all, lots of Hollywood bigshots paid detective Anthony Pellicano to bribe phone company employees and cops to listen in on the phone calls of his clients' rivals and enemies. London tabloids hacked into the voicemails of celebrities routinely. How do we know this hasn't been common on Wall Street too, perhaps also using higher tech means such as back doors to telephone metadata and data mining looking for interesting patterns?

56 comments:

Steve Johnson said...

It's much simpler.

The fed has printed massive amounts of money.

Newly printed money gets injected into the economy by Wall Street firms who take a cut.

Wall Street debt is also federally guaranteed - a form of treasury securities.

Do you really need inside information to make money lending short and borrowing long if you're covered by the fed when you come up short?

Jon Claerbout said...

A corollary is to make money you need information asymmetry. For example, we had the 2008 crash because “nobody knew the value of the mortgages”. Logical from a lawyer’s point of view, but stupid from the point of view of any engineer or web designer.

Anonymous said...

Almost no question that the big outsized return guys are trading on inside information. I worked in quant strategies for 10 years leading up to the crash in 2008 and while we always outperformed the benchmark, only a couple years did we outperform net of fees. So we essentially kept whatever "alpha" we were able to generate.

Anonymous said...

Steve, I'm amazed you aren't more sophisticated about EMH. It's simply an illogical non-starter, and the sort of academic battiness I'd expect you to see through.

First, there are countless, straightforward examples of price discrepancies that persist for years and years. My favorite is RUSHA and RUSHB. Two classes of stock, financially equivalent, "B" shares have more voting rights ... and "B" trades at a consistent, sizable discount. For years it's done so. It makes no sense at all. Why doesn't the market correct it? Because it's not efficient. How could it be? It's full of flawed human beings operating under all sorts of strange incentives.

Second ... have you ever actually tried to value a stock? The idea that Wall Street is just overflowing with people who can take "all available public information" and magically come up with an accurate price is laughable. How many shoes will Nike sell in China next year? Well gee, you'd have to know quite a bit about China ... and there's a lot of public information available about China ... well I'm sure every last apparel analyst on Wall Street is a full-fledged China expert. I mean, the information is publicly available ...

What drives equity prices over the medium-to-long term isn't "news" or inside information ... it's earnings. And how do you predict earnings over the medium to long term? By understanding the future of profits in a given industry better than the market as a whole does. As you might imagine, predicting how much money a given company will make in 10 years is quite difficult. And in fact, history demonstrates that the market kind of sucks at it, which is why some stocks rise by thousands of percent, while others fall.

Does that means no one can do it? No, smart people can, if they focus on price, study a ton, stick with what they know, and avoid silly risks. Several famous people who have done this come to mind ...


Anonymous said...

Look at hedge funds. Huge money, pretty lackluster performance. Why? Because of value transference. Smart people take advantage of stupid people.

Anonymous said...

Most of the insider trading cases seem to be old-fashioned personal relationships. X knows some inside information and tells Y in exchange for ethnic solidarity, friendship, bags of cash, &c.

Unknown said...

I think you are off on the date of the start of the central bank era. Most would place it in the late 1980's. Certainly if you look at the explosion of leverage, the late 1980's is a good starting point. It also coincides with the signing of the Louvre Accords.

As far as market efficiency, the strong form has been shown to be fantasy for at least a century. In the 1950's chocolate companies were able to wipe out traders using inside information to game cocoa prices.

The other two options can both be true, and probably are true. The market is a random walk in the aggregate unless you have special knowledge. In that instance, you can predict the price changes and profit accordingly.

dearieme said...

I understand that Senators prove to be very successful investors.

Anonymous said...

The problem with the EMH is that for someone else to beat you to the punch there must exist a "someone else" who is *not* beaten to the punch.

There's a trading joke that illustrates this. An economist and a trader are walking down the street.

Trader: "Hey, there's a $20 bill on the sidewalk."

Economist: "That's impossible. Somebody else would have picked it up already."

So if you're smart and quick, you can make money, because then you're the very mechanism by which markets are made efficient. The firm where I work generally makes money, and we're not trading on insider information.

I'm not saying Wall Street doesn't get up to various shenanigans. I'm sure they do, and you may be right about surveillance technology playing a role. But there's such a thing as being too cynical.

David said...

If insider trading based on surveillance is, indeed, occurring on the street, it doesn't lack for mental coaches:

The Morality of Insider Trading

Any means of surveillance is simply a source of life-giving information just like the information that fire scares many dangerous animals. So spying must be not only okay but also laudable. If you raise doubts about this, you're a socialist or an anti-Semite. And "Ayn Rand" damns you from her grave!

Captain Tripps said...

Agree with the finance profs. I never bought into a truly efficient market. Perhaps on Planet Vulcan, where everyone is logical and rational, but even Vulcans are prone to logic/rationality failings.

An example: Say you could create a market of 100 participants, all with the same start point in terms of capital to invest. However, beyond that, this market has to consist of participants that represent The Market writ large, in other words, infinitely varying levels of education, cognitive ability, etc. Say you give them all a piece of information about a component of the market at the same time. Because of the varying abilities of each participant, some will quickly process the info, conclude on a profit strategy, and execute as soon as possible to take advantage of the info asymmetry. Most of the other participants won’t process the info as quickly and can’t leverage this time-differential arbitrage opportunity. Some of these early actors WILL make a profit; some of the early actors will have concluded the wrong strategy and will break even or take a loss. All the rest will adapt the same or some variation of the strategies of the early actors (what the EMH predicts), thus cancelling out any remaining profit opportunity. So, there is always an initial information asymmetry. The trick is to be right at the right time; one way to increase the odds of that happening, beyond your incredible smarts and deep market understanding, is to rig the Kobayshi Maru test by obtaining additional information asymmetry through insider dope ahead of time.

Quite frankly, that is how the hedge funds in the ‘90s made most of their gobs of cash; the smart Wall Street dudes realized that the internet and computers would give them a speed advantage if they could poach the right quants from MIT and elsewhere to build the algorithms that could sniff out market price differentials that they could exploit before the conventional Wall Street crowd. Couple that with extensive insider networking (they didn’t even necessarily need explicitly illegal pre-trade info such as, “Hey, Proctor and Gamble will announce a merger with Colgate Thursday at 8 a.m.”, they only needed to hear “Hey, word is that P&G may be making an acquisition”), and voila! it’s raining cash. But, now that most of that opportunity has been leveraged (most, not all), the hedgies are having a harder time of it.

Anonymous said...

The efficient market hypothesis alone proves beyond a reasonable doubt that the banking market is completely rigged but of course there's a lot more proof besides

http://www.rollingstone.com/politics/blogs/taibblog/everything-is-rigged-vol-9-713-this-time-its-currencies-20130613

Surveillance is probably part of it e.g.

http://www.huffingtonpost.com/2013/06/23/phone-hacking-scandal-media-independent_n_3483136.html?utm_hp_ref=media

but i don't think the banks need to do this most of the time because they can do easier things like organize interest rate cartels or they themselves can *supply* the information others use, information which the banks know is false in advance. ZeroHedge has had lots of examples of this over the last few years.

The Wall St. banks are organized crime.

.

"The fed has printed massive amounts of money. Newly printed money gets injected into the economy by Wall Street firms who take a cut."

If they were doing that we'd have hyper-inflation. Only the *profit* of the ZIRP trades is being injected into the wider economy. The rest is just being shovelled into the black hole inside the banking system.

bjdubbs said...

It's much simpler than that.

Here is one source of outperformance in the 80s: "James Dinan had a guy at the SEC reference room who would fax over filings a day before most people had access to them."

http://stableboyselections.com/2013/03/10/james-dinan-of-york-capital-on-charlie-rose-in-risk-arbitrage-theres-no-real-information-advantage-anymore-today-its-much-more-of-a-judgment-game/

Jeff W. said...

It seems to me that the most cost effective use of surveillance is not to obtain inside information to use as an investor, it is to obtain embarrassing, secret information that can be used to blackmail.

J. Edgar Hoover didn't keep his job for 48 years because he had files full of hot stock market tips.

A computer app for today's world would be one that could monitor millions of phone calls and extract the valuable dirt.

rob said...

If the efficient market hypothesis were true, then pump & dump (in the original, not PUA sense) would not be possible. I suppose prices might reflect all information, whether true or not, but then the market wouldn't be very efficient.

anony-mouse said...

Even if all information is out there, that doesn't mean it will be believed.

For example virtually all information concerning HBD is available but a huge number of people don't believe it (and even if they did, if they belong to large organizations, the organization can't do anything with it.

'Lion of the Blogosphere' once asked on his blog if anyone could figure out how to make money from knowledge of HBD.

So why isn't everyone here rich (I'm assuming)? HBD knowledge seems to be a type of 'insider information' that some should be able to use.

Anonymous said...

EMH and Wall Street fortunes have nothing to do with each other. EMH talks about making money by predicting which way stocks move, which is a tiny fraction of the money made on "Wall Street" - (meaning what exactly - Manhattan financial companies?)

If you're a market-maker, or asset manager, or investment banker, or bond trader, or sell-side analyst, or broker ... you can make fortunes just fine without having a clue which way stocks will move.

Not that there isn't money to be made with insider information. I'd say Preet Bharara is doing a good job going after the most egregious offenders. But it's a tiny piece of the money to be made in finance.

Anonymous said...

off-topic multiple isteve themes

1) Further thought and chatting with people vis a vis the idea that medical improvements have disguised an increase in violence by reducing homicides.

http://www.nytimes.com/2002/08/12/us/medical-gains-reduce-deaths-from-assaults.html

"Without the medical advances, the researchers calculated, 45,000 to 70,000 homicides would have been recorded annually nationwide."

Chatting to people i think we've come up with why the resulting pattern is so inconsistent including between ethnic groups i.e. the critical factor is the amount of *time* between the assault and the arrival of the paramedics and how that varies between different kinds of aggravated assault e.g. in many street assaults someone is likely to call the emergency services while the attack is happening whereas at the other extreme a domestic assault with no witnesses might not be reported for hours.

.

2) A comment from a previous thread.

"Supposedly clever alternatives to quotas have often proved even worse. For example, to get more black and Hispanic firemen, the city of Chicago lowered the passing score on the fire department’s hiring exam to the fifth percentile among white test-takers. Then, it just picks randomly among test-passers. I don’t live in Chicago anymore, but that’s a frightening way to hire the guys who are supposed to save your life."

I'm wondering if the difference in homicide rates for different cities with a lot of street level aggravated assaults - which imo are the kind most likely to respond to the paramedic innovation - is actually a difference in their paramedic setup.

(The pieces this could apply to would be the dispatch part of the service and/or the actual paramedic part.)

(It could also be the physical aspect of the service i.e. number of ambulances etc rather than the human part so it may not be anything to do with AA.)

.

So is Chicago's homicide rate to do with more aggravated assaults leading to more homicides or just a crappier paramedic service?

For various reasons I think it's more likely to be the latter.

Whiskey said...

Steve, it is important to separate a class of people, Wall Street, from individual firms and investors.

Over the past thirty years, no investor even those with inside info have beaten the SP 500 year in and out. Even those with savvy, who foresaw the Mortgage Crisis of 2008, have had very bad years with losses. Example: John Paulson. Who might be right about gold being a good hedge, but has had bad timing.

The WSJ has had good coverage of the insider info firms and the web they formed, including SAIC, and other firms, that offer "consultancies."

I have no doubt that a lot of trawling on meta data, including things like Facebook and Twitter are a part of Wall Street, not the least of which are hedge funds publicly based on trawling those sources for information to trade on.

Information Asymmetry is hard to KEEP. It is relatively easy to acquire. But in a rapidly changing world, tends to degrade quickly. An example is say, China. Which is relatively opaque and a thing like say, the Central Bank of China jacking up reserve requirements without notice to slow down the shadow banking sector to keep things from overheating, can have huge echo effects on places like Australia and Chile which supply commodities to Chinese sectors financed by Shadow Banking.

Michael Ryan said...

read the market wizards series also reminiscences of a stock operater

Anonymous said...

Stupid punk.

John Seiler said...

Something different happened to cause the Long Boom. Reagan's 1981 tax cuts were delayed to 1983, which is when the boom really took off. And in 1982 Volcker, instead of goosing the money supply, as you say, instead stopped his anti-inflation policy that had in fact become too strict. Look at the price of gold. It rose to $800 in 1981, then was crashing fast, landing at $350 (crushing inflation), where it stayed for almost two decades, until Greenspan's panic after 9/11. If Volcker had not stopped the gold drop in 1982, it might have gone down to $10 and caused a severe deflationary depression (not of the Keynesian type, but of the type that happened after the Civil War when gold was restored at its pre-war price). It was Jude Wanniski who convinced Volcker to end the deflation and let the economy boom without inflation, pegging gold unofficially at $350. Wanniski describes it here: http://www.polyconomics.com/index.php?option=com_content&view=article&id=1281:a-review-of-our-deflation-analysis&catid=32:essays

Eric Rasmusen said...

In semi-strong efficiency, there is still the question of defining "public information". The information that a company is in trouble may be publicly available in footnote 28 of its annual report, but still be "private information" in the sense that nobody realizes what the words really imply. One reason to hire MBA stock analysts is so they can find those footnotes. Economic theory suggests that by hiring a $45,000 analyst, the company will be able to make $45,000 worth of trading profits on average.

There's also a lot of entirely legal legwork to be done looking at a company's physical operations to figure out what they're up to. A surveillance device on a public street counting the number of trucks that leave a warehouse could be quite useful.

Anonymous said...

EMH is largely hogwash.

One must consider that there is a lot of information out there, much of it is obscure (but not inside), and there are infinite techniques to analyse it. People on the far right of the bell curve do come up with new techniques to analyse it, and there aren't a great number of these people. Furthermore, there is a lot of work in understanding various sectors. e.g. tech, mining, that may take a whole career to really understand just one sector.

The EMH is best thought of as true for those of average IQ, or lower (i.e. the bulk of the population). It's like speed limits. Sure, those people on the right edge of the bell curve suitable to be race car drivers can exceed the speed without much risk. But for the average person there is definitely a risk in exceeding the speed.

smead jolley said...

starting salaries for new MBAs on Wall Street were about $45,000, while run of the mill MBA jobs started at $30,000.

Not sure why you think this spread said anything about stock market theories. In '82, I knew a U. Chi. MBA student and in his mind, the grand distinction was between IB jobs and "retail" banking. Having to take a job with a retail bank was considered to be a humiliation, a kind of little death. I would imagine starting salaries would have reflected that prejudice. That guy ended up being prosecuted for insider trading about the time of the Dennis Levine affair.

Anonymous said...

"Wife: Hastings Wasn’t Reporting On Jill Kelley"

http://losangeles.cbslocal.com/2013/06/25/wife-hastings-wasnt-reporting-on-jill-kelley/

"LOS ANGELES (AP) — Journalist Michael Hastings was not working on a story about Florida socialite Jill Kelley when he died in a fiery single-car wreck last week, his wife said Tuesday on Twitter.

Elise Jordan tweeted that she wanted to correct the record after seeing erroneous reports about the work of her husband.

To correct the record, since I've seen it erroneously reported a few times: @mmhastings was not working on a story about Jill Kelley.—
Elise Jordan (@Elise_Jordan) June 25, 2013

Kelley claimed in a federal lawsuit filed earlier this month that the government willfully leaked false and defamatory information about her and her husband, violating their privacy, in the scandal that led to Gen. David Petraeus resigning as CIA director."

Anonymous said...

" Friend: Michael Hastings Was Working on “Biggest Story Yet” About CIA "

http://www.prisonplanet.com/friend-michael-hastings-was-working-on-biggest-story-yet-about-cia.html

"A friend of Michael Hastings told Fox News today that the Rolling Stone journalist was working on the “the biggest story yet” about the CIA before his suspicious death and that Hastings drove “like a grandma,” making it extremely out of character for him to be speeding in the early hours of the morning.

Sgt. Joe Biggs told Fox News’ Megyn Kelly that “something didn’t feel right” after Hastings sent a panicked email saying the authorities were on his tail, adding that the story of him driving at high speed in the early hours of the morning was completely out of character.

“His friends and family that know him, everyone says he drives like a grandma, so that right there doesn’t seem like something he’d be doing, there’s no way that he’d be acting erratic like that and driving out of control,” said Biggs, adding that “things don’t add up, there’s a lot of questions that need to be answered.”

Biggs said he had contacted Mercedes asking them if it was normal for their cars to “blow up to that extent” and for the engine to fly out 100 feet from the site of the crash.

Biggs also confirmed that Hastings was working on a story about the CIA and that it was “going to be the biggest story yet.”"

kgaard said...

Rothbard used to talk about this: When you print money, those who are closest to the printing press win, and those who are farthest away see no benefit. The '80s were a period in which street prices were adjusting upward for the inflationary monetary policy of the 70s (which saw gold go up 10x). Thus, it was a GREAT period to be a stock market investor. You had a huge macro tailwind.

Ichabod Crane said...

When this wave of billion- and multibillion-dollar startups that make money by spying on citizens come to an end? Google, Facebook, Amazon, etc., and now even video game divisions, like Sony Playstation -- all these businesses make money by gathering user data, sometimes for ethically dubious purposes.

How do you like my idea of a movie script (probably for a comedy) based on citizens who start their own company that spies on the these Big Data firms. Maybe they are young video-gamers who rig a Playstation to fly cheap, home-made radio controlled "drones" (perhaps modified to deposit microphones with radio transmitters) around locations where executives speak freely. At first, the citizen gamers try to make money by learning broad social trends derived from the user base of Facebook, etc., but they soon discover it's more profitable to learn specific financial decisions made by individual executives of the Big Data companies. In a twist on blackmail, they also blackmail some executives -- not by threatening to reveal scandalous secrets about the deeds of the blackmailed individuals -- but to reveal that the executives are collecting scandalous secrets about politicians, celebrities, etc., for their own blackmailing purposes. To make it visually more interesting than robots flying around, they could put horrible, scary faces on the drones that mimic facial expressions of the citizen gamers, with the monster faces mapped to radio control masks. When they would have the power to speak and and to frighten people. What are some entertaining ways citizens could spy on the companies that spy on citizens?

Ichabod Crane said...

One last thing about the movie idea: the "anonymous" Guy Fawkes mask, for which Time Warner is paid a fee with each sale, should be revealed to have tiny embedded transmitters used to identify and spy on the wearers.

Anonymous said...

The EMH strikes me as the sort of idea that's so blatantly wrong only an academic could believe it.

I also don't buy the notion that there's pervasive insider trading on Wall Street (though I by no means believe it's rare), or that there's some sort of giant conspiracy between bankers and the NSA. Show me some evidence and I'll take such claims seriously.

In reality, it's not all that difficult to make money in the market if you have an IQ > 130, some economic common sense, and the right temperament for it. Of course, most people don't.

Abe Fauxman said...

Respect, please.

Hepp said...

"It's much simpler.

The fed has printed massive amounts of money.

Newly printed money gets injected into the economy by Wall Street firms who take a cut.
"

Is this really how it works? Can someone recommend good reading material on the connection between Wall Street and the Federal Reserve?

I've read Ron Paul, Murray Rothbard, etc. But I tend to think they have an ideological bias. Is there a more mainstream figure that has explained this for a mass audience? Not saying that Paul and Rothbard are wrong, but, since I don't have time to investigate as much as I'd like, I would tend to put more stock in the analysis of a professor from a prestigious university.

Anonymous said...

http://blogs.the-american-interest.com/wrm/2013/06/26/did-obama-pave-the-way-for-keystone/

Liberals don't wanna discuss Obama's energy policy since they are supposed to be pro-environment.

Conservatives don't wanna discuss it cuz it upsets their narrative of Obama being some 'socialist' who won't 'drill baby drill'.

Just as Clinton locked up lots of Negroes but we were not supposed to notice, Obama allowed lots of drilling to save the economy but no one's really noticing.

So often, opposition is who,whom.
If a Republican were in office and all this fracking was going on, the libs would be up in arms. But since Obama is doing it and it's been good for the economy, even green libs are shush about it.

And cons who would have opposed many of Bush II's policies just let them slide cuz he was 'one of us'.

It all stinks.

dirk said...

Wall Street makes its money on marketing not trading. Mutual funds and hedge funds do not beat the market on average, but that doesn't matter as long as people are putting money into them.

Eric said...

Most of the insider trading cases seem to be old-fashioned personal relationships. X knows some inside information and tells Y in exchange for ethnic solidarity, friendship, bags of cash, &c.

I think this is true. When I worked in that industry (before HFT), it was understood you needed to have an office in NYC. Why? Because your people had to talk to other people in the industry. It's impossible for me to believe all those thousands of finance guys eating at the same restaurants and talking to each other aren't passing along tips.

Look at what stocks do in the days leading up to big announcements - they almost always trend in the right direction (up for good news, down for bad).

Anonymous said...

Hepp
"Is this really how it works? Can someone recommend good reading material on the connection between Wall Street and the Federal Reserve?"

It's the baseline fraud at the heart of the banking system.

If you increase the money supply while the sum of goods stays the same then you will get inflation as prices are bid up by the increased stock of money. However the inflation doesn't occur the instant the money is created. The inflation is the result of the money being *used* in the economy. What this means is created money has the pre-inflation value until after it's used. Which means institutions that have the power to create money effectively steal the value of that money from the existing money stock.

It's a fraud - the equivalent of a 2% or so tax a year that goes to the bankers and their associates.

Slightly differently the Federal reserve has created trillions out of thin air since 2008 as loans to various banks *but* that hasn't entered the economy (yet). It's been used for other purposes hence no hyper-inflation (yet).

.

This is just the baseline fraud though. Wall St. has turned into organized crime but they own the media and congress so the only way out is if their greed crashs the system completely.

Mangan said...

Probably not germane to your post, Steve, but the existence of the market beating strategies of value and momentum means that the EMH is wrong.

Mr. Anon said...

Perhaps the NSA has its own investment fund. If it does, I bet it does really well

Anonymous said...

Is there any evidence of hedgies using surveillance techniques? The Bloomberg reporters were using info from the data terminal side of the house, but seemingly not trading on it.

If surveillance was widespread I'd think that the hedgies would all be gleefully copying the successful practitioners, and that there would be signs and portents. Pellicano was known in Hollywood as an ethically flexible problem-solver. Are there any similar people or companies in New York?

Anonymous said...

Speaking of finance and money; what do you think, Steve?

http://washingtonexaminer.com/gays-are-the-next-jews-of-fundraising/article/2532413

Anonymous said...

Why is it called the invisible hand?

Because it isn't there.

x said...

"in the long run.. we're all bread" ~ john maynard grains

Dave Pinsen said...

"EMH and Wall Street fortunes have nothing to do with each other. EMH talks about making money by predicting which way stocks move, which is a tiny fraction of the money made on "Wall Street" - (meaning what exactly - Manhattan financial companies?)

If you're a market-maker, or asset manager, or investment banker, or bond trader, or sell-side analyst, or broker ... you can make fortunes just fine without having a clue which way stocks will move.

Not that there isn't money to be made with insider information. I'd say Preet Bharara is doing a good job going after the most egregious offenders. But it's a tiny piece of the money to be made in finance."


This is mostly true. The best position to be in is where you make money collecting tolls, regardless of which way the traffic is headed. The wave of deregulation that started in the late 1970s (and deregulated stock commissions), combined with other tech and regulatory changes (e.g., more electronic trading, decimalization, etc.) eliminated a lot of toll collector jobs on Wall Street. The most obvious example of that is the floor of the New York Stock Exchange itself.

In the late 1990s, financial TV reporters used to get jostled by specialists and traders when reporting from the floor. Today, there are a lot fewer folks there.

Dave Pinsen said...

"Probably not germane to your post, Steve, but the existence of the market beating strategies of value and momentum means that the EMH is wrong."

Value investing is predicated on the market being efficient eventually. In reality, the market is probably efficient most of the time for the most widely-traded stocks. But the market can be inefficient for tiny stocks for a long time. I wrote about one example recently. At the time I bought shares of that stock (2 years ago), it was trading for less than the value of the cash and marketable securities on its balance sheet.

Anonymous said...

http://dangerousminds.net/comments/carol_kaye_is_paul_mccartneys_favorite_bass_player_he_just_doesnt_know_it_w

Anonymous said...

Hepp
"Is this really how it works? Can someone recommend good reading material on the connection between Wall Street and the Federal Reserve?"

Another anonymous answer for you ... the best sources I know of are the Federal Reserve itself, and the folks at Monetary Realism.

Short answer: No, that's not how it works. Money gets injected into the economy when ordinary depositary institutions make loans.

Anonymous said...

Value investing is predicated on the market being efficient eventually.

It's equally predicated on frequent inefficiency, without which there is no undervaluation to exploit.

In reality, the market is probably efficient most of the time for the most widely-traded stocks.

It's probably more accurate to say there's a tendency towards efficiency, and that this tendency becomes stronger the more widely scrutinized a stock is.

Large cap stocks can still be substantially mis-valued, however. Shortly after Deepwater Horizon, BP was trading at something like $25, down from nearly $60. When shares hit their nadir, the worst case estimate of their liability being thrown around in the press was approximately equal to their annual operating income. So, worst case scenario, they break even one year and then it's back to strong profits.

The numbers just didn't add up. And shortly thereafter, BP was trading above $40.

Jill said...

I always wondered how Steve Cohen of SAC Capital amassed his personal 6.5 billion dollar fortune (he recently purchased a painting for $150 million dollars).
I am certain it wasn't by Technical Analysis.

HHonda said...

Its the Banking-Militray-Industrial-Complex.

Technical Analysis is mining Financial Data; Surveillance is predictive Technical Analysis. Now I see a Neck, a Head, a Hat or is it a Turban.

Svigor said...

I'm wondering if the difference in homicide rates for different cities with a lot of street level aggravated assaults - which imo are the kind most likely to respond to the paramedic innovation - is actually a difference in their paramedic setup.

Yesterday or day before, Drudge had a link (from NY Post, I think) about a black paramedic who beat the rap for allowing a black woman (pregnant, IIRC) die one room over. She wouldn't even go one room over and look. She dressed like some wannabe diva for her court date and showed no sympathy for the dead woman or her family, or remorse for her behavior whatsoever.

scottlocklin said...

"Over the past thirty years, no investor even those with inside info have beaten the SP 500 year in and out."

Nonsense on stilts. The S&P500 has made approximately 0% in the last 15 years. Lots of people have done well in that period of time. The previous 15 years it went up a factor of 10. That's an 8.5% annualized return. 5.5% adjusted for inflation. You could do better than that buying the Russel 2000; people have. I know futures traders who have maintained 20% average returns since the late 60s.

The efficient market hypothesis serves too purposes; 1) it makes financial math a lot easier, and 2) it makes finance professors feel better for making $100k a year.

Anonymous said...

Svigor

That's the kind of thing i twas thinking. Given how dramatic the effect of paramedics has been, especially with street violence, i wouldn't be surprised if it was possible to correlate homicide rates with the local AA policy as applied to paramedics - especially places like Chicago where nepotism reigns as well.

Anonymous said...

"Short answer: No, that's not how it works. Money gets injected into the economy when ordinary depositary institutions make loans."

It's a two-stage process. The Fed decides the limits. The banks then lend to those limits.

Anonymous said...

"Still, perhaps it's worth taking seriously the logic of Semi-Strong Efficiency: "Therefore, only investors with additional inside information could have advantage on the market.""

It's a bit like the money supply fraud. Newly created money will be worth a little less after the inflation it will cause - but only after it's spent.

The same is true of information if that information will be used as a basis to invest. For example if a Goldman Sachs department decides a stock will go up and puts that information in a newsletter to subscribers then Goldmans can bet on that stock going up - because they know their subscribers will buy it.

So although i assume surveillance does take place for various reasons it seems to me for a big bank being a creator of investment information is like inside information you manufacture youself.

The exception to the rule might be an organization or individual that wasn't a source of investment information themselves who wanted to tap into institutions who *were* sources of investment information.

Anonymous said...

"The exception to the rule might be an organization or individual that wasn't a source of investment information themselves who wanted to tap into institutions who *were* sources of investment information."

To extend the monetary metaphor tapping into sources of investment information - using some kind of bugged terminal for example - and then using that to turn yourself into an artificial source of investment information would be analagos to counter-feiting.