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> The stock market finds the 'correct' price for stocks, by aggregating conflicting beliefs and predictions of traders. 10-20 years ago, maybe. It's now driven
by Rooster61 8y ago
> The stock market finds the 'correct' price for stocks, by aggregating conflicting beliefs and predictions of traders.
10-20 years ago, maybe. It's now driven largely by semi-autonomous algorithms monitoring swings/trends. I'd argue that it finds a 'simulated' price rather than a 'correct' price. The stock market is much less susceptible to emotional speculation than it used to be, for better or for worse.
A quick google yields multiple articles claiming various percentages for algorithmic vs meatspace trading. Investopedia claims that as early as 2010, upwards of 60 percent of all trading was done by algorithm. That number has risen since as computation has become cheaper. Source: https://www.investopedia.com/terms/a/algorithmictrading.asp https://www.investopedia.com/terms/a/algorithmictrading.asp
- SketchySeaBeast 8y agoBut won't these algorithms be based upon the whatever the meatspace traders were feeling? We've added indirection, but I don't know if it's in any way better.
- Rooster61 8y agoYes, but in a very different way, with a very different dynamic. While before, it was as OP said in that it's based on an aggregation of speculative sentiment from traders, it's now a pebble in pond ripple effect, where a panic of a few can trigger a runaway snowball effect MUCH faster than organic trading (algorithmic trading happens on the order of milliseconds). Also, I didn't say it was better. IMO it's probably just as volatile/dangerous. It's just harder to predict as it's not as rooted in actual emotion/speculation.
- bduerst 8y agoAt one point that was it, but now the algorithms are based also on what other algorithms are "feeling". You don't need to be the smartest person in the room to be good at trading, you just need to know what everyone else in the room is thinking. Algorithms are part of the room now, so they try to predict what other algorithms are thinking.
- rmah 8y agoYou're using a different meaning for 'correct' than what people in finance mean in the context of exchange markets.
- tardo99 8y agoDidn't people blame algorithms for the 1987 market crash? Are you sure they reduce volatility? I suspect they just compress it all into short spans of time -- i.e. they just move it around.