If you've ever read about market efficiency and the various theories about how markets operate, then you will forgive me for having been bored by the subject lately. What's always nice, however, is when you read something that brings an otherwise boring subject to life, which is exactly what happened today when I read about the New York Stock Exchange's declining trading volume figures in light of rising competition from smaller, higher-tech, markets.
Market efficiency theories essentially discuss how markets, exchanges in our case, react to the availability of new information. Ranging from weak-form to strong-form efficiency, these theories outline the extent to which, and how quickly, markets react to information that is both public and held by insiders alone. Technical analysts, for example, who solely rely on the data that markets provide are dependent on the quality and accuracy of that data; flaws in their representativeness of what is happening in the market can mean missed opportunities, or worse. So, why should increasing competition for the NYSE trading volume worry technical analyst? Lower trading volume.
Lower trading volume at the NYSE means less data. Less data, in turn, means that technicians have a less-than-whole picture of what is taking place in the markets. When the stocks in your portfolio trade on multiple exchanges, it takes much more effort to consolidate the information from the various markets to provide you with clear insights into what is taking place. The more disparate the trading volume, the less reliable your data.
Personally, this sounds like an ideal situation for the regulators to step-in. A competitive trading landscape is certainly important because it helps to lower the transaction costs that we all pay when we trade our stocks. An efficient market, however, is no less important once you understand the implications of what may happen when it's no longer there.
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