Evidence on the Speed of Convergence to Market Efficiency
Tarun Chorida, Emory University
Richard Roll, UCLA
Avanidhar Subrahmanyam, UCLA

Daily returns for large and mid-cap stocks listed on the New York Stock Exchange are not serially dependent. In contrast, order imbalances on the same stocks are highly persistent from day to day. These two empirical facts can be reconciled if sophisticated investors react to order imbalances within the trading day by engaging in countervailing trades sufficient to remove serial dependence over the daily horizon. How long does this actually take? The pattern of intra-day serial dependence, over intervals ranging from five minutes to one hour, reveals traces of efficiency-crating actions. For the stocks in our sample, it takes longer than five minutes for astute investors to begin such activities. By 30 minutes, they are well along on their daily quest. (Accepted Winter 2003.)

Members engaged in the management of large portfolios must be very sensitive to the origins of their transaction costs since their trading generally will move the market. Members whose management strategies depend on identifying these price moves must be aware of their origins and of their predictability. This research shows that although intraday order imbalances tend to persist from day to day, it appears that trades can recognize them and trade against them within an hour. Thus large traders have less than an hour to take liquidity before others start to take it in front of them.