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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?

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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.

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  • So a volatile security is less efficient than a flat one, right?
    – Victor123
    Feb 28, 2014 at 22:29
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    @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, 2014 at 23:53
  • That is one hell of an explanation. Thanks so much
    – Victor123
    Mar 1, 2014 at 1:42

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