Fifth prelude: October 19th, 1987

  The NASDAQ National Market System on which Autodesk, Inc. stock is traded maintains a market surveillance office to monitor activity in stocks and attempt to detect unusual price changes, unexpected increases in trading volume, or other action which might indicate a stock reacting to information not yet publicly disclosed. When the action of a stock triggers the monitoring computer's filter, a person in the office calls an officer of the company to inquire whether the company knows of any information which might cause the unusual trading pattern and, if so, when it will be disclosed. The patterns the computer watches for are those that indicate apparent inefficiencies in the market such as strong buying of a stock with little concern for price, which could signal accumulation of the stock by an investor who had illicitly obtained information about an impending takeover.

    On October 19th, 1987, action in Autodesk's stock tripped the warning and Al Green received a call from NASDAQ's market surveillance office to ask if ``there was any reason for the unusual action in Autodesk stock''. Let's see, could it be that the call was placed right in the middle of the worst global financial crash in the history of economics? Quite likely....

While humorous, the event limns a deeper unity between the efficiency of a market and its closeness to the point of equilibrium between buyers and sellers. It is well known that a market can be efficient only if it is liquid: that is, has enough transaction volume so buyers and sellers are readily matched. In a ``thin'' or illiquid market a slight imbalance between buyers and sellers, even if momentary, can cause large swings in price unrelated to any underlying property of the asset being traded. That Autodesk stock exhibited the symptoms of an inefficient market on a day that broke all records for trading volume demonstrates that volume alone does not guarantee efficiency. Efficiency may require that the market be close to an equilibrium point in the physical sense: where not only are buyers and sellers closely matched in numbers, but that they share information, beliefs about the future, and models of valuation which form a continuum with a single modal point.