Market Efficiency vs. Inefficiency
Market efficiency means price already reflects all available information. Inefficiency means the market is lagging, confused, or temporarily off-balance. Traders don’t make money from efficiency — they make money from the moments when the market screws up.
What an Efficient Market Looks Like
Efficient markets are clean and stable. Liquidity is deep, sentiment is balanced, and price moves smoothly without random spikes.
- tight spreads
- consistent depth on the DOM
- predictable reaction to news
- clean rotations
This lines up with normal price discovery — buyers and sellers agree on fair value.
What an Inefficient Market Looks Like
Inefficiency happens when new information shocks the market or when liquidity dries up. These moments create edge because price lags behind reality.
- air pockets in liquidity
- sloppy rotations
- fast spikes and whipsaws
- imbalanced aggression
Inefficiency pairs directly with volatility expansions — when liquidity thins, volatility explodes.
Why Inefficiency Creates Opportunity
When the market is inefficient, price is wrong. Not in a “fair value” sense — in a liquidity sense. Someone gets caught offside, and price has to adjust aggressively to catch up.
| Inefficiency Type | Example |
|---|---|
| Liquidity Gap | DOM shows thin levels → price jumps |
| Sentiment Shock | News flips outlook instantly |
| Order Flow Imbalance | One side hits the tape nonstop |
How Liquidity Providers Influence Efficiency
LPs keep markets efficient. When they pull out, the market becomes chaotic and inefficient. When they step back in, the market stabilizes again.
If you’ve read how LPs behave, you already know why efficiency disappears: they stop quoting risk.
Bottom Line
Efficient markets hide edge. Inefficient markets create it. Your job isn’t to predict the future — it’s to recognize when the market temporarily loses balance and takes a few seconds to correct itself.