Is it possible to judge just by tape reading and analyzing the price action, if a particular security in a particular market is efficient or not? I often read commentaries by experts that state that how such and such market for such and suck stock/commodity/derivative is becoming more efficient and easy money is drying up.

Is there a way to arrive at this conclusion myself by looking at the raw price action?


The shortest-hand yet most reliable metric is daily volume / total shares outstanding. A security with a high turnover rate will be more efficient than a lower one, ceteris paribus.

The practical impacts are tighter spread and lower average percentage change between trades. A security with a spread of 0% and an average change of 0% between trades is perfectly efficient.

  • So a volatile security is less efficient than a flat one, right?
    – Victor123
    Feb 28 '14 at 22:29
  • 1
    @Victor Absolutely: if there were no risks to a security expressed by 0% change between trades and 0% spread, and it traded continuously not continually, it would be perfectly efficient thus would possess all foreknowledge of all events because they would all be perfectly discounted. A security with unknown growth presents risk thus cost equal to opportunity so is inefficient. In short, if a security forever trades perfectly at its long run discounted value forever, all future information is perfectly known, thus it is perfectly efficient. That is the ideal which doesn't exist.
    – user11865
    Feb 28 '14 at 23:53
  • That is one hell of an explanation. Thanks so much
    – Victor123
    Mar 1 '14 at 1:42

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.