Technological Change Market Efficiency

Thanks to the internet, you don’t need to leave your house to buy most things...you can just buy them on Amazon. Reviews seem fishy? Easy...plug the item’s URL into Fakespot, an algorithm that does its best to judge how many of the reviews are legit, giving you an altered score.

When you're a buyer, you now have liquid access to vastly more information than you did before. You’re not limited to the selection of soaps on a grocery store shelf; you have the whole internet at your fingertips, plus reviews (and review police). What products thrive online or die on the vine is largely due to this access to information about the products, creating a more efficient market (at least in theory) than before the internet was a thing.

The inspection of pricing via smart-ish technology has increased market efficiency pretty much across the board. Not too long ago, stock market trading was done “on the floor” with crazy dudes yelling at each other in a flurry, with trades happening at a glacial pace. Today, we’ve got algorithms trading faster than our little human brains can even comprehend.

Like you with your soap, investors and brokerages have more information about stocks, companies, and performance than ever before. They can make algorithms with data that previously wasn’t possible. Technology has brought information and accessibility to the forefront, making the market more efficient. Still, it’s not fully efficient, especially when the information out there is asymmetric, or when people are lying. Surely you’ve seen bad reviews on Amazon complaining about how the product shipped was nothing like the picture. That’s an inefficiency right there. But ironically, them telling you the “truth” about the product is helping to create a more efficient market by informing you, another potential buyer, to maybe shop elsewhere.

Likewise, research and high-frequency trading are great for increased market efficiency...but only up to a point. If there’s too much high-frequency trading that is all reacting the same way to market changes, it can create a sudden sell-off, causing extremely quick and dramatic increases and decreases in the value of securities, not to mention glitches.

Technology might be smarter and faster than we are, but it’s got its fair share of problems as well.