InvestorQ : How true is it that traders make the markets more efficient?
Lavanya Subramanian made post

How true is it that traders make the markets more efficient?

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sarah Leo answered.
3 years ago
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This is a very important role that traders play. Let us say the same stock is quoting at a spread-gap of 1% between the BSE and the NSE. A smart trader will spot this arbitrage opportunity and buy the same stocks in the exchange where it is priced lower and sell in the exchange it is priced higher. This also happens in the case of stocks where the cash/futures arbitrage spread is too wide. For example, if the stock of RIL is quoting at Rs.900 and the future is quoting at Rs.918, then it translates into an arbitrage spread of 2% per month. Traders and arbitrageurs will immediately buy RIL in the spot market and sell it in the futures market until the time the spread comes down to more realistic levels. So when you trade expecting a mean reversal, it is the action of traders that brings about the mean reversion by trading away the inefficiencies.
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