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But many participants are reacting to small signals only from the exchange, at least at the microseconds and smaller latencies. Real world events are not usually interpreted that fast by humans or computers; typically only market activity is. A greater danger of course when at that micro/nano scale the only information to inform trades is other market action which can cause positive/negative feedback loops between participants - for most market participants outside the HFT's and the like this could be a negative factor to the markets.

Your argument may hold for "real world" information and even then there's probably ways to even the playing field; but I'm not so sure for market information (e.g. momentum trades). Most short term trading is of the latter category except certain dates. After all information asymmetry is something that markets tend to want to reduce.




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