Nerds on Wall Street: Math, Machines, and Wired Markets

5.6. All the Stocks, All the Time

The previous section had a lengthy list of possible sources of information that can be used to detect market inefficiencies that could potentially add value in an active portfolio. Much of time, any one of these potential sources of value added is likely not to be large enough to cover the cost of trading. When enough of them stack up to indicate a good stock to hold or bad one to avoid, the combined signals can be used to make investment decisions in a very disciplined way.

There are many thousands of stocks to choose from. The broad Wilshire index in the United States includes 6,700 names. Globally, there may be 40,000 investable stocks. The use of a computer-driven process allows an investor to analyze all the stocks, all the time.

The combined contributions of the various inefficiencies can stack up to provide potential value added, if the investor can trade fast enough to capture the value of the signals, and effectively enough not to lose their value in turning ideas into portfolios.