Inefficient Market Theory

[onesmith 10]

The only inefficiency reasonably large enough to consider is the discernible footprint of the best automated strats non randomly generating the non random data everyone follows. Rule based logic instruction sets are extremely efficient (at generating inefficient data).

 

Random inefficiencies (or inefficiencies in random data) quickly evolve toward extinction when those inefficiencies attempt to coexist in an environment where competition (for profit) creates rule based order. It doesn't take many generations for this rule based logic (based on other than any random edges) to result in (rule based) structured data which is the ultimate inefficiency.

Edited April 22, 2013 by onesmith

[steve46 12]

Item #1, lets start with the obvious....every time a market bellweather reports earnings, non-random and therefore "inefficient" behavior takes place...in fact, because earnings are scheduled (they do not happen at random)....the "inefficient" behavior can be seen in advance of the report release, more clearly at the release itself, and for a period of time after the release (this effect is known as persistence) and is amplified if that company posts a surprise, beating or missing expected earnings....

 

Item #2....same as item #1....except that the inefficient behavior takes place in front of, during and after most high impact economic reports....once again these examples take place on a scheduled basis....

 

These few examples and many others are the subject of books by Peter McKenna and Ben Warwick...I believe that Warwick's book was the first to come out, and is thought to be (by myself and others) to be "the bible" when it comes to capitalizing on market inefficiencies

 

In addition to these obvious inefficiencies, additional opportunities exist at the time of Bond Auctions, at the FOMC announcement, at the beginning of each month as institutions receive funds from retirement accounts, etc....

 

In addition there are inefficiencies associated with the open (particularly the NYSE open) as well as at the lunch hour and last hour of RTH. Many professional firms train their associates to spot these inefficiencies and they even have a name for them ("layups").....

 

I could go on for quite a while citing similar examples in the currency and bond markets, but why....at some point one should get the message...markets cycle from random and efficient to non-random and therefore inefficient, and the reason that happens is simple....HUMANS cycle back and forth from random and efficient behavior to non-random and inefficient behavior...As long as human beings are part of the scene, whether they write the programs or act with discretion, that element of non-random, inefficient behavior will be embedded in price action..

 

while I am on the subject, the idea that random behavior evolves "rapidly" toward extinction is simple ignorance.........professionals have been taking advantage of these (and many other) very basic inefficiencies for decades....in fact I train people to take advantage of these inefficiencies in the same way that I myself was trained to do, many years ago....

 

Good luck folks

Edited April 30, 2013 by steve46

[onesmith 10]

Excellent post steve. Thank you. It appears that's works well for you and when used in conjuction with all the other stuff you've demonstrated mastery over you've definitely carved a nice niche for yourself within the market.

 

When I start topics like this it's rarely my intent to convince anyone that there's any wisdom whatsover in anything I state. I also tend to include lots of disinformation. My intent in revealing this is unrelated to anything other than my process which is about me so please don't feel bad like you got caught in something bad here because you haven't and the things you say make a lot of sense. The context of this topic doesn't detract from that.

 

My process relies on my subconscious to resolve everything presented to it. I've been wanting to start another topic besides this one in which essentially just naming the topic and creating it without any intent of ever adding to it or caring if anyone posts to it. I can't do that because I would have to include a word that I refuse to use in the public domain. Ok, just this once I will break that rule and share that word. Fractals.

 

Hopefully the karma of saying that in the public domain won't adversely affect my subconscious but self-observant as I am I've already noticed a drastic decrease in my typing speed and flow of ideas. However, I'm going to allow it to be ok this once for me to mention something that might be proprietary because it might just be that trickery and disinformation I mentioned. BTW, please don't take any of this as being about you. It is not, it is about me, it is always about me.

 

Most of the stuff everyone posts most of the time is about them. Occassionally someone unexpected says something that clicks and off I go on an extended research.

 

I'm aware I'm rambling and not attempting to tie anythig into a cohesive flow with paragraphs or even sentences anyone can follow but I'm in an excellent mood right this moment and don't care about much other than sharing the joy I'm experiencing at this moment.

 

Hope you are well and everything is going your way in the markets.

 

 

 

I

[steve46 12]

"but I'm in an excellent mood right this moment and don't care about much other than sharing the joy I'm experiencing at this moment."

 

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"In my opinion onesmith...you present yourself in a way that suggests some type of cyclical emotional disorder....and without further information, of which I assure you I have no interest, I can only respond to what you present in print......."

 

 

clearly we are done now......best of luck to you also

Edited April 30, 2013 by steve46

[SIUYA 11]

The only inefficiency reasonably large enough to consider is the discernible footprint of the best automated strats non randomly generating the non random data everyone follows. Rule based logic instruction sets are extremely efficient (at generating inefficient data).

 

Random inefficiencies (or inefficiencies in random data) quickly evolve toward extinction when those inefficiencies attempt to coexist in an environment where competition (for profit) creates rule based order. It doesn't take many generations for this rule based logic (based on other than any random edges) to result in (rule based) structured data which is the ultimate inefficiency.

 

if you follow this logic - any rules based system that attempts to profit from what appears to be an inefficiency in the markets will be doomed to failure - not really sustainable as a profitable system because - it is discovered by others,or was never really more than a random pattern.

In which case - you can either give up on rules based systems....or ....look at different data - look into the dark matter of the markets. (The problem is markets are made up of one thing - price....all the other rationales reasons theories etc is bullocks.) You can only make money out of buying at one price and selling at a higher price. So if you ignore price (even a deep value investor requires the price to be 'good') you are also doomed.

 

All the talk about random markets, and efficient markets stems from (or ultimately revolves around and ends back up at ) the choice between being a passive or an active investor/trader and is about the simple question - can this system after costs etc (and take into account develoment time, maintenance etc) sufficiently outperform the market to be worth while doing it?

 

Possibly why many rules based managers of real money have many systems going, constantly change improve and revolve those systems,,,,, or have a single system that suffers big drawdowns and relies on other forms of diversification.

Which is why as small flexible traders the greatest edge we have is the ability to do nothing and wait and not participate in the randomness. Maybe that is the single most important rule - to wait?

We also have the ability to pick up the small inefficiencies - the layups (Steve you have so many great 'we in the industry' sayings ) that either the bigger guys help push or create or they cant be bothered about.....for every hard working dilligent trader there are probably 100 passive investors, or mandated investors. These guys are not bothered about some smal ticks or they help create them...being small is an advantage to pick up the crumbs

 

So onesmith - as food for thought....are you a passive or active investor/trader?

Edited April 30, 2013 by SIUYA