Did HFTs and Algos Kill Efficient Market Theory Again on the Unemployment Report?

Many college courses will try to teach you that it is nearly impossible to beat the market through time because the broad markets are supposed to reflect all relevant information at any given time. History has proved over and over that the markets are inefficient, and algorithm trading and high-frequency trading systems may only be exaggerating the death of efficiency for the broad market. Tuesday’s unemployment report market reaction sure seems to prove yet again that efficient market theory (or the efficient market hypothesis) is dead.

Take a look at the Labor Department report’s post-market reaction, where markets rallied immediately on the news because this implies that quantitative easing can continue much longer. It should have been widely assumed that the payrolls were going to be weak, considering that a government shutdown was imminent, even if the debt ceiling debate would have been weeks off at the time.

The Labor Department was closed during the federal government shutdown. It used the shutdown as an excuse not to report the payrolls and unemployment rate on the due date of October 4, and instead delayed the report until Tuesday, October 22. The Labor Department did gather the information on time and could have made the release on October 4, but it appears as though it needed the resources to calculate the figures. Do you really believe that? Consider that we still had some weekly jobless claims reports, and that California’s computer systems have been “updating” during many recent national labor reports.

Another issue is that the Labor Department has been considered to be the most aligned with any presidential regime and subject to making things look as good as possible for any president. That is not any anti-administration comment of today, nor is meant to be conspiracy theory. That has been discussed as being the case for two decades or more, under various administrations.

Another issue is that Labor Department data and other governmental economic reports have been rumored to be leaked from time to time. We will not point at any one situation, because they are numerous, with huge trades taking place shortly before data is announced. If the Labor Department had this data for more than two weeks and did not release it until today, it seems at least fair to ask how secure that data was and/or how many more people would have had access to it than normal.

24/7 Wall St. views algorithms (algos) and high-frequency trading shops (HFTs) as one and the same, even though there may be vast differences from one firm to another in their trading goals and strategies. The net impact is that machines are trading, often in vast millions or billions of dollars in seconds, or even fractions of seconds. So what do you make of it when the markets react noticeably to the upside to a weak payrolls number right after the release when it was a number that should have either been known or should have been discounted?

The real reason to buy or sell based on Tuesday’s market hours should simply because you were locking in profits as a seller (or short selling bets) or because you believe that the stock market is going higher. This Labor Department report should have been discounted.

What you need to remember is that stocks rallied handily, even when there was a hint that the Democrats and Republicans had reached a debt ceiling and shutdown deal. In fact, the DJIA only pulled back about 6% from its peak during the entire shutdown in D.C. If stocks will rally on hints and hardly sell off on what could be really bad news, that is a market telling you it wants to go higher.

HFTs and algos have been accused of hijacking the stock markets. Tuesday’s reaction to the Labor Department news sure looked like the HFTs and algos ran with a market number. As for the little guy in the market, there merely are not enough little guys with enough combined money to act in the same manner that algos and HFTs can act or react to news. Does that sound like an efficient market (if you are not an HFT or algo trading system)?

One last issue about efficient markets, or in the case equilibrium … George Soros knows a thing or two about market inefficiency as he has become vastly wealthy from it. He once said, “Contrary to the tenets of market fundamentalism, financial markets do not tend towards equilibrium; they are crisis prone.”

Efficient market theory is dead, and the reaction to the delayed Labor Department report sure appears to indicate that HFTs and algos seem to be prolonging that notion. Do we dare ask if you believe in mere coincidence? The good news is that Zero Hedge posted a graph showing that HFT is on a serious decline, but something has to explain today’s silly behavior right after the Labor Department report.

Again, the stock market sure seems like it wants to favor longs over shorts at the present time. If you need a rationale for why stocks are likely heading higher, we have two issues for consideration. The first is the path to 2,000 on the S&P 500 Index in a recent call. The second is beyond 2,000 up to as high as 2,584 on the S&P 500 Index in a summer call that is still relevant today.