That New York Stock Exchange prices should follow a random walk has now become dogma in academic finance. The standard argument is simple: Any non-random fluctuations in price (other than a steady upward drift approximating the risk-adjusted rate of return) would be exploited by speculators, who would buy before an expected rise in price or sell short before an expected fall, eliminating any predictable fluctuations and making all price changes random.

This argument assumes, however, that speculators are able to sell short as readily as they can buy long. Under NYSE rules, the lender of the stock retains the proceeds of a short sale and pays no interest on them. The speculator can show a profit from a short sale only if the stock’s total return (dividends plus appreciation) is less than zero.

Thus a structural characteristic of the equities market — namely, the fact that short sellers do not receive prompt use of the proceeds of the sale — prevents rational speculators from acting to rationalize stock prices in cases where expected return is more than zero but less than the rate of return from comparably risky securities.