Blog Two: Stock Market Efficiency in UK

This week, I have a better understanding of International Stock Exchanges and Stock Market Efficiency. Stock Exchange takes convenient for both the investors and companies. It reduces the cost of investment and can concentrate large portion of resources especially the international Stock Exchange to the most productivity. Companies can raise fund from all over the world! And if we focus on the stock market pricing efficiency, there are there levels of efficiency, they are Weak-form, Semi-strong form and Strong form efficiency. We can know what kind of market efficiency by checking how the share prices reflect the information.

Let us check London stock market’s efficiency by looking at one company – Barclays Bank PLC. The following is Barclays’ recent share price moving:

(Resource from London Stock Exchange website)

On 26th January 2011, Barclays announce it may cut 1,000 jobs because it is closing UK’s financial advice service. Barclay has to pay fine due to its financial Advice Services (failing to give suitable products to customers, etc.). On that the day, the share price fell from 298.4 per share to 295.5 per share. On 27th, BBC report Job fair Offers call centre would be post in Sunderland and Barclays revealed it would start a recruitment event and aiming to fill more than 200 positions. Then on that day, the share price rose to 299.4. On 31st, Barclays Bank manager has been given a suspended jail sentence because she siphoned more than ￡17,000 into her daughter’s bank account who was in serious debt. So on that day, the share price decreased to 293.8. We can see the share prices move just based on the news published. When the bad news occurs, the share price fall, the good news appears, it goes up. This may indicate that the UK stock market is semi-strong form efficient. The market is reacting quickly to the new information and people can’t make abnormal returns by studying publicly available information.

The share price follow the ‘random walks’ (Kendal: 1953) and we cannot know what kind of news may publish tomorrow. But we may use the information that has already published and the relative industry movement to predict the future share price movement. Whether we can have a successful prediction is depend on our knowledge, experiences and fortune. Why Warren Buffett can stably and continually earn money in the stock market? May be we can learn something from him.