In 1970, in “Efficient Capital Markets: a Review of Theory and Empirical Work,” Gene Fama defined a market to be “informationally efficient” if prices at each moment incorporate all available information about future values. Informational efficiency is a natural consequence of competition, relatively free entry, and low costs of information. If there is a signal, not incorporated in market prices, that future values will be high, competitive traders will buy on that signal. In doing so, they bid the price up, until it fully reflects the information in the signal. Much of the confusion about “efficiency” reflects simple ignorance of this definition. [,,,]
An informationally efficient market need not process orders efficiently. An informationally efficient market can have economically inefficient runs and crashes, so long as those crashes are not predictable. [,,,]
Are markets completely efficient? No, and Gene said so in his very first article. Efficiency, like all perfect-competition supply-and-demand economics, is an ideal, which real-world markets can only approach. Empirical work can find only how close to or far from the ideal a given market is.