Analytical Investments

In his essay ‘The Only Game In Town‘ the investment manager Jack Treynor identified three kinds of traders: naive, liquidity market-makers, and informed.


One way to understand Treynor’s distinction is to examine the different analytical investments that each trader makes. Naive traders invest in public information and simple models of how markets work like popular technical analysis indicators. Liquidity market-makers rely on market microstructure to monitor order flow. Informed traders have more sophisticated models of how markets work and may develop proprietary information sources.


Treynor’s distinction also applies to how effective research programs are developed. Effective research programs build on knowledge gaps in publicly available information and in scholarly communities and networks. To develop these capabilities a researcher must be aware of relevant signals from journal publications, other research teams, and the priorities of funding agencies. Collecting and evaluating this information – and noting the knowledge gaps – enables researchers to move closer to Treynor’s ideal of informed traders who have proprietary knowledge and skills. Making the necessary analytical investments as part of a research program – from methodology to cultivating new information sources – is key.