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Suppose a pension fund wants to buy 10 million shares of MSFT. Suppose the "real" price of MSFT is $22.00 and the market price is $22.05. That amounts to roughl
by vecter 16y ago
Suppose a pension fund wants to buy 10 million shares of MSFT. Suppose the "real" price of MSFT is $22.00 and the market price is $22.05. That amounts to roughly $500,000 in extra costs for its clients (may be more or less, because the transaction will have price impact and probably rip through a few levels of the bid/ask book). These costs are forwarded to you and me, the customers of the pension fund. Multiply this by the trillions of shares being traded every year, and that adds up to a huge difference.
- cameldrv 16y agoYes, but in that case, they're probably buying from another pension fund, or a mutual fund, or someone. If they pay 500k less, that's 500k less the other pension fund doesn't get. No value is created or destroyed by people trading at marginally wrong prices. Furthermore, as long as it's the same people trading with each other at randomly wrong prices, things even out in the wash. These days though, you're dealing with PhDs doing nothing but programming computers to trade, and extracting the money from these mistakes. This makes it not even out in the wash anymore, and they're being paid billions of dollars to solve a problem that never existed. I would much rather have those PhDs figure out how to program a computer to make an electric car that is 5% more efficient, or a wind turbine that is 5% more efficient, or a search engine that is 5% more accurate, or even figure out how to make a physical constant known to 5% greater accuracy. All of those things increase the total value in the world. Instead, they're all being siphoned off by trading companies to do things that make them money, but don't create much if any value.