Strong Form Efficiency

Not everyone sees the stock market the same way. Speculators see it as a potential goldmine...if they could only gain the advantage of information that everybody else lacks. Strong form efficiency believers think otherwise.

There’s a spectrum of how “efficient” everyone thinks the market is. Speculators aim to take advantage of inefficiencies. For instance, buying one asset on one market, and selling it for a higher price in another market, where it’s already going for a higher price. Those on the other end of the spectrum believe that the market is already pretty efficient, and that, therefore, it’s silly to try to make money by speculating.

Strong form efficiency is on the far end of the efficient market hypothesis scale. Strong form efficiency purports that stock markets are perfectly efficient just the way they are, and that all public and private info is reflected in the price at any given moment. That means all of the researching in the world won’t find you an undervalued stock...they just don’t exist. This is in line with the random walk theory, which theorizes that past movements in stocks don’t predict the future movements, rendering technical analysis useless.

Strong form efficiency is so strong that they don’t even think that insider information gives insiders an advantage. Remember when Martha Stewart went to cupcake camp prison for insider trading? That’s because she was such a terrible person that the court convicted her for a prison term based on structural, technical violations of insider insider trading laws...information the public wasn’t privy to. (She blamed a lot of it on her broker, and on her being too busy to really think, and on her puff cake having just fallen.)

Forms of the efficient market hypothesis more toward the middle of the spectrum say that markets would be efficient if everyone had access to all information...no hidden or asymmetric information.