The extent to which a skilful manager can outperform varies with time. It depends, primarily on the dispersion of security returns in a measurement period. If we want to judge investment skill, we need to be aware of the effect of market dispersion.
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Participants in financial markets are usually categorised as informed or uninformed. Here we expand this classification by including another group which we refer to as the foolish participants. Foolish traders actively transact at inefficient prices to their own detriment.
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Market participants can have a variety of legal competitive advantageous in public security markets. One of the more controversial ones is speed which is exploited by high-frequency traders (HFTs). Should the activities of latency arbitrageurs, such as HFTs, be curtailed or are they beneficial to markets?
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Latency arbitrageurs outperform efficient markets. To explain this, we describe the flow of new price sensitive information into financial markets using three steps.
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