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Posted on July 31st, 2012, by

Today, pricing strategies are very important since they can influence consistently the marketing performance of a company. However, pricing is particularly important in financial markets where the role of price is crucial. At the same time, in the contemporary business environment, pricing often depends on information, especially in regard to financial markets. In fact, the information or the lack of information can influence the price substantially. This is why companies operating in the financial market often use information as a means of manipulation with the help of which they can increase or decrease the price, even though there are no objective reasons for the change of a pricing strategy. In this respect, it should be said that specialists working in the financial market have developed a variety of approaches to pricing and various pricing strategies based on the use of information. At this point, “noise trader”¯ and “efficient market”¯ are two pricing strategies, which are probably the most important in the contemporary financial market. At the same time, “noise trader”¯ and “efficient market”¯ are two different strategies, which, though, can be quite efficient if they are applied properly and in the right time.

On analyzing the existing pricing strategies, it is important to underline that they heavily rely on the information because, today, information is spreading very fast. Therefore, if a company manages to spread certain information which can influence the price, than it is likely that this information will be spread fast and it can affect a large number of companies and players in the financial market. In such a context, the importance of the application of such strategies as “noise trader”¯ and “efficient market”¯ can hardly be underestimated.

In fact, “noise trader”¯ is entirely focused on the information in the financial market. This strategy has a strong theoretical ground, according to which a financial market cannot develop efficiently without a noise. What is meant here is the fact that the market withoutĀ Ā  noise traders is likely to break down because prices in such a market will become fully revealing. Therefore, informed traders are unlikely to enter a market without noises because they perceive this market is not prospective. In this respect, it should be said that the lack of noise means that financial markets are developing steadily but there is not unexpected operations taken which can change the price consistently. In such a situation, traders naturally cannot count for exorbitant profits because all participants playing in the market are aware of the current situation in the market. Moreover, they have all the information they need to perform steadily without rapid changes in their pricing policies. As a result, the lack of noise is associated with the low prospect of profitable entering the market. In such a situation, many experienced traders prefer to enter markets where noise traders are present and the accumulation of such noises provides ample opportunities for experienced traders to maximize their profits.

On the other hand, it is necessary to understand that the presence of noise traders in the financial market is not always an indicator of stability or huge prospects of the market. In stark contrast, some specialists (Bogle, 1994) warn about the risk of an upcoming crisis in the market where noise traders are particularly active. In fact, specialists (Kendall, 1996) estimate that normally there should not be much noise traders in the market, which develops steadily because there are no objective reasons to make noise, which actually raises certain disturbance in the financial market. Consequently, the presence of a large number of noise traders in the financial market undermines the stability of the market because it cannot function normally and develop steadily if there are permanent stir concerning some companies, stock prices, etc. Inevitably, noise traders influence pricing directly and, depending on the noise and the current market situation, noise traders can provoke either a rapid growth of prices or their decline.

In fact, it is due to such rapid and unexpected changes of price they can maximize their profits.

It is worth mentioning the fact that often the noise trader benefits the most from the noise spread in the financial market because they are actually the most informed whether the information spread is true or not and they can often manipulate with this information to maximize their profits. At the same time, their benefits can be short-run benefits because the spread of noise is accompanied by a risk of the downfall of the market because of financial problems which can affect the major players in the market. Potentially, the excessive use of noise can provoke the bankruptcy of leading companies operating in the market that can paralyze the normal functioning of the market. Therefore, the unreasonable use of noise can lead to destructive effects to the financial market.

On the other hand, supporters of the concept of noise traders (Burton, 1996) argue that it is impossible to profit from trading in a completely efficient market. Informed traders need the existence of noise traders to hide their trades and by trading on their private information, informed traders make profits. Basically, through trading, informed traders gradually release relevant information to the market prices and together with the noise traders, they bring the market back to the equilibrium. However, critics of noise traders (Hebner, 2007) argue that such an approach is quite risky and it is not always possible to re-establish the equilibrium in the market which has been once broken by noise traders.

In this respect, it should be said that the major critics of noise traders are supporters of the concept of efficient market. In actuality, the concept of efficient market asserts that financial markets are informational efficient (Burton, 1996). This means that prices on traded assets, such as stocks, bonds, or property, already reflect all known information. In other words, traders know the basic information concerning traded assets and they can adequately assess their price. In such a situation, the difference between efficient market and noise traders is obvious since the latter need noise, while the former believe that such a noise is impossible because all the information concerning pricing and traded assets is already known to the players operating in the financial market.

Furthermore, supporters of the concept of the efficient market stand on the ground that it is impossible to consistently outperform the market by using any information that the market already knows. However, it is impossible to deny pointblank the possibility that if some noise occurs in the market it can provoke considerable changes in pricing, but, as a rule, such a noise should be really significant and related to unparalleled changes or trends in the market or performance of certain companies. At this point, it is possible to admit the fact that efficient market cannot totally reject the importance of noise traders and noise at large, but, unlike noise traders, efficient market does not pay much attention to noises because, according to the efficient market concept, noise cannot affect the market consistently or, at least, can affect it very seldom and only in exceptional cases.

At the same time, it should be said that efficient market is more oriented on the stability of the financial market since this concept avoids the unnecessary noises and changes which can affect consistently the price and the general situation in the financial market. In contrast, noise traders tend to undermine the stability in the financial market because in such a way they can maximize their profits. Therefore, it is possible to speak about noise traders and efficient market as antagonistic concepts or strategies which can be applied in the financial market. On the other hand, it is possible to estimate that when both these strategies are applied rationally they can balance each other and stabilize the situation in the market allowing certain traders maximize their profits due to occasional noises which occur in the market.

Thus, taking into account all above mentioned, it is possible to conclude that noise traders and efficient market are very popular strategies which affect pricing and the situation in the financial market consistently. They are controversial trends, but still they can work efficiently when they are applied rationally. In fact, it is obvious that efficient market, being totally deprived of noises, is likely to tend to stagnation because traders will have all the information they need that will make it practically impossible to maximize their profits by means of trading. On the other hand, the application of noises in the financial market can be also very accurate and careful, because financial markets are particularly susceptible to the negative influences of noises. In fact, the excessive use of noises can provoke a profound crisis in the financial market and traders can be unable to restore the equilibrium in the market if the effects of the noise go out of control. Therefore, it is possible to estimate that noise trader is a very risky but profitable strategy if it is applied properly, while efficient market is a less profitable strategy but it allows maintain stability in the market.

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