RIP: Efficient Markets Hypothesis – 70% of stock trades last 11 seconds or less

One of the economic theories that dominated a mainstream economic theory during the last few decades is Efficient Markets Hypothesis.  Essentially, an important part of the concept is that asset prices, such as stock prices on the stock exchange, accurately reflect all available information about the future earnings of the firm.  Further, it implies that stock price movements reflect changes in these perceptions.  There’s a lot wrong with the theory as is explained quite well in Zombie Economics by John Quiggin.  But let’s add this little bit from Washington’s blog and Naked Capitalism.

Washington’s Blog

The Fourteenth Banker writes today:

In the stock market, program trading dominates volume. I heard recently that 70% of trade positions are held for an average of 11 seconds.

He’s correct.

As the New York Times dealbook noted in May:

These are short-term bets. Very short. The founder of Tradebot, in Kansas City, Mo., told students in 2008 that his firm typically held stocks for 11 seconds. Tradebot, one of the biggest high-frequency traders around, had not had a losing day in four years, he said

Similarly, FT’s Martin Wheatley pointed out last month:

I know of one HFT firm operated out of the west coast of the US that boasts its average holding period for US equities is 11 seconds

And market analyst Peter Cohan writes at AOL’s Daily Finance:

70% of trading volume on the major exchanges is conducted by high-frequency traders who hold a stock for an average of 11 seconds.

The fact that the vast majority of stock market trades are held for 11 seconds shows that the stock market is not a real market with real traders governed by the law of supply and demand, and with no real price discovery.