How Fast Do Markets Price In News and Events?
Markets are fast-paced, and traders are always on the lookout for the latest news or economic indicators that could impact the markets.
One of the most common questions that arise among traders is how fast are things priced in?
When news breaks, do markets react instantly, leaving traders with little or no opportunity to capitalize on the information?
Is this all the realm of systematic traders who have sophisticated machines to react in real-time?
Or is there a delay, creating an opportunity for discretionary traders to make profitable trades?
The answer to these questions is not straightforward and depends on a range of factors, including the nature of the capital flows.
In this article, we will explore how fast markets react to news and economic events and what factors influence the speed of the reaction.
Key Takeaways – How Fast Are Things Priced In?
- The Efficient Market Hypothesis (EMH) suggests that financial markets are efficient, and asset prices reflect all available information.
- The speed at which markets price in news and events depends on factors such as the type of news, market structure, time of day, market participants, and the nature of capital flows.
- Traders can profit from short-term price movements by reacting quickly to news and events, but they must be cautious not to overreact, and they can also look for less efficient or slower markets for additional opportunities.
Efficient Market Hypothesis
Before delving into the specifics of how fast things are priced in, it’s important to understand the concept of the Efficient Market Hypothesis (EMH).
The EMH states that financial markets are efficient, meaning that asset prices reflect all available information.
In other words, if there is any new information, it is quickly and accurately reflected in the market price.
This theory suggests that it is impossible to consistently outperform the market through analysis or research because prices always reflect all available information.
However, there are different forms of market efficiency.
The weak form suggests that past prices and returns do not provide any useful information for predicting future prices.
The semi-strong form suggests that all publicly available information is already reflected in the stock price.
The strong form suggests that even private information, not yet publicly available, is already reflected in the stock price.
Yes, the EMH might just be academic hogwash, but for most market participants, the idea that there’s probably no alpha is probably a reasonable assumption.
As such, smartly achieving beta returns (efficiently extracting risk premiums from the market) is a sound strategy.
Speed of Pricing In
The speed at which markets price in new information depends on the type of information and the market’s structure.
In general, news where algorithms are already well-trained is priced in more quickly. This includes things like nonfarm payrolls, PMI releases, inflation reports, and GDP.
In addition to the type of news, the market structure can also impact how quickly prices adjust.
Markets that are highly liquid, meaning that there are many buyers and sellers, tend to adjust more quickly than less liquid markets.
For example, the foreign exchange market, which is the most liquid market globally, can adjust to news within a second, while the real estate market, which is much less liquid because properties are complicated to buy and sell, can take weeks or even months to adjust to news.
The speed of pricing in also depends on the time of day and the market participants.
In the US stock market, the first hour of trading tends to be the most volatile, with prices adjusting more quickly to news than later, quieter hours.
This is because market participants, including traders, are most active during the first hour, which leads to more liquidity and faster price adjustment.
Market Participants and Capital Flows
The speed of pricing in also depends on the market participants and the nature of capital flows.
Different sizes and different motivations
All traders/investors have different sizes and different motivations.
Some have a longer-term outlook and are less likely to react to short-term news.
Some have a shorter-term outlook and are more likely to react to short-term news and events.
The nature of capital flows also impacts how quickly prices adjust.
Hot money vs. Cold Money
There are also the concepts of so-called hot money and cold money.
Hot money refers to capital that is invested for a short period and is quickly moved from one asset to another based on short-term news or events.
Hot money tends to be more reactive to short-term news, leading to faster price adjustment.
Traders and HFTs are examples.
These entities are often looking for any little edge or inefficiency to capitalize on.
Cold money, on the other hand, refers to capital that is invested for the long term and is less sensitive to short-term news and events.
Cold money tends to be more stable and less reactive to short-term price movements.
Pension funds and sovereign wealth funds would be examples.
For these types of stickier investors, one corporate earnings report, one inflation report, etc., is generally not going to change what they’re going to do.
In general, the speed of pricing in is faster when there is more “hot money” in the market that’s more reactive to such events.
When there’s more hot money reacting to short-term news and events it can lead to faster price adjustments.
Opportunities for Traders
The speed of pricing in can create opportunities for traders to profit from short-term price movements.
Traders who are quick to react to news and events can capitalize on price movements before they are fully priced in. This tends to fall more toward systematic traders who have the technological edge.
However, traders must be careful not to react too quickly to news and events, as this can lead to losses if their interpretation of it is not accurate.
Traders can also look for markets that are less efficient or have slower price adjustment times.
For example, emerging markets tend to be less efficient than developed markets, leading to slower price adjustment times.
Traders who are willing to take on the additional risk of trading in emerging markets may find opportunities to profit from slower price adjustments.
FAQs – How Fast Are Things Priced In?
What is the Efficient Market Hypothesis (EMH)?
The EMH is a theory that suggests that financial markets are efficient and that asset prices reflect all available information.
This theory suggests that it’s not possible to consistently outperform the market through analysis or research because prices always reflect all available information.
How quickly do markets adjust to news and events?
The speed at which markets adjust to news and events depends on a range of factors, including:
- the type of news
- market (e.g., liquid vs. illiquid)
- market structure
- time of day
- market participants, and
- the nature of capital flows
In general, unexpected news or events that have a significant impact on the economy or financial markets are priced in more quickly.
What is the difference between hot money and cold money?
Hot money refers to capital that’s invested for a short period and may quickly change from one asset to another.
Cold money, on the other hand, refers to capital that is invested for the long term and is less sensitive to shorter-term news and events.
How can traders profit from short-term price movements?
Traders who are quick to react to news and events can profit from short-term price movements.
However, traders must be careful not to react too quickly to news and events, as this can lead to losses if the market quickly adjusts or the criteria they’re trading on isn’t robust.
Traders can also look for markets that are less efficient or have slower price adjustment times to find additional trading opportunities.
How does the nature of capital flows impact the speed of pricing in?
The nature of capital flows impacts the speed of pricing in, with hot money leading to faster price adjustments and cold money leading to less rapid price adjustments.
Conclusion
The speed at which markets price in news and events depends on a range of factors, including the nature of the news, market, market structure, the time of day, who the buyers and sellers in the market are, and the type of capital flows.
Traders who are quick to react to news and events can profit from short-term price movements, but must be careful not to overreact to short-term price movements.
Traders can also look for markets that are less efficient or have slower price adjustment times to find additional trading/investing opportunities.