How Information Enters Market Prices
In any financial market, the fundamental cause of price changes is usually not the transactions themselves, but changes in information. When new information enters the market, such as policy announcements, corporate financial reports, on-chain data changes, or macroeconomic data releases, traders adjust their expectations based on this information and influence prices through buying and selling behaviors.
Information typically enters prices through a process: first, a small number of information-sensitive traders react, then more market participants gradually understand the information and join in trading, and finally prices complete their adjustment. Therefore, price changes often do not occur instantaneously, but rather are a gradual process of reflecting information.
From a market structure perspective, information typically enters prices through several channels:
- News and public information releases
- On-chain data or market data changes
- Large transactions or capital flows
- Social media and market sentiment changes
The essence of price fluctuations is the market’s continuous process of absorbing new information and repricing.
Efficient Market Hypothesis and Information Asymmetry
In financial theory, there is a very important concept called the “Efficient Market Hypothesis.” This theory argues that, given sufficient information and rational market participants, market prices will quickly reflect all available information, making it difficult to achieve excess returns over the long term.
Efficient markets are typically divided into three levels:
- Weak form efficiency: prices already reflect historical price information
- Semi-strong form efficiency: prices reflect all public information
- Strong form efficiency: prices reflect all information (including non-public information)
However, in real markets, information is often asymmetric.
Some people obtain information earlier than others, or understand information faster, which creates an information advantage. Traders with information advantages can trade before prices fully reflect the information, thereby generating profits. Therefore, markets are not completely efficient, but rather a dynamic process that constantly fluctuates between “efficiency” and “information asymmetry.”
Arbitrage Behavior and Price Correction Mechanisms
When market prices deviate from rational levels, arbitrageurs enter the market and profit through buying low and selling high or cross-market transactions, and their trading behavior pushes prices back to rational ranges. Therefore, arbitrage behavior is actually a price correction mechanism.
Arbitrage behavior typically includes the following forms:
- Price spread arbitrage between different exchanges
- Basis arbitrage between spot and futures markets
- Correlation arbitrage between different assets
- Arbitrage between prediction markets and actual probabilities
The existence of arbitrageurs makes it difficult for prices to deviate from rational levels for extended periods. Arbitrageurs play the role of “price correctors” in the market, and through the pursuit of profit, they make market prices more closely approach true value or true probability.
Market Sentiment and Group Expectations
Besides information and arbitrage behavior, market prices are also influenced by sentiment and group expectations. Market participants are not always completely rational; they may be influenced by fear, greed, herd mentality, and other factors, causing prices to deviate from rational levels in the short term.
In many cases, price increases are not solely because fundamentals have improved, but because the market generally expects future prices to rise; price declines sometimes stem from panic sentiment rather than changes in fundamentals. This phenomenon shows that prices reflect not only information, but also the collective expectations of market participants about the future.
From a market operation perspective, prices are typically influenced by three forces:
- Information (Information)
- Arbitrage (Arbitrage)
- Sentiment and Expectation (Sentiment & Expectation)
These three factors together determine the formation and fluctuation of market prices.
