As I said, if we woke up this morning and prices were magically efficient in an idealised sense, at most a few quants would go home and retire early, and tomorrow we'd be back at the level (in-) efficiency that allows people to be market makers.

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bofadeez 11 hours ago | parent [-]

How can prices reflect all available information if there's no profit to collecting the information and there are no informed quant traders? Who is collecting the information exactly so that prices can reflect it and what is their incentive for doing so? Efficiency doesn't happen magically or automatically - traders create it. It's like a kaggle contest* to process information, with the incentive being profit.

You don't believe in the existence of residual return orthogonal to priced cross sectional risk factors (alpha)? E.g. Trends, momentum, volatility clustering, etc. many easily demonstrable inefficiencies. VPIN and order flow toxicity are highly predictive features. Most HFT MM especially in crypto involves hybrid alpha in addition to the (visible) bid-ask spread, which it itself an "inefficiency" to compensate market makers like Jane Street and other successful firms that operate on the assumption that weak form EMH is not accurate.

* https://www.kaggle.com/competitions/jane-street-real-time-ma...

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eru 4 hours ago | parent [-]

I don't know what your question is about?

I would have hoped that by now it was obvious that we are talking about a _specific_ weak form of the EMH that takes friction into account?

What is your whole first paragraph about? Who are you trying to convince? Where's the strawman that claimed that the strongest version of EMH that you can imagine is literally true?

There's no single weak form of EMH that could be accurate or inaccurate: there are many versions of the EMH in various strengths and dimensions (that can be accurate or inaccurate).

To be more specific: Jane Street believes (or acts lie they believe) that markets are at least efficient enough that it takes a lot of effort for them to make money. As a very, very weak form: someone doing chart astrology, eh, I mean technical analysis, on S&P 500 stocks won't beat the market. But even much stronger versions than this are defensible.

The real strong forms that say that all information is preciously reflected in profits is a simplifying assumption you can sometimes make to make your life easier. Just like you sometimes neglect friction in physics. But when you want to decide how long your train needs to emergency brake, you kinda need to take friction into account. Similarly, when trying to make money in the market or trying to understand how others like Jane Street make money, the strongest EMH is not a good guide.

	▲	bofadeez an hour ago \| parent [-]
		Question is about EMH and how you expect efficiency to be achieved absent profit for collecting the information. There are 3 accepted forms of EMH. I'm talking about weak form - just price history and nothing else. E.g. formulaic alpha have demonstrable predictive value in modeling. All that to say you believe trading profits are real. Maybe you just need to learn more about what a buy side alpha quant at two sigma does for a living. Trading models can be robust and exploit real inefficiencies. Weak form EMH is demonstrably false on it's face, as you agree.