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Wondering if this could lead to an "index fund bubble". If everyone invested using index funds, markets exhibit increasingly erratic behaviour https://www.forbe

• Scoundreller 7y ago
  There’s no difference, in aggregate, between retail investors investing in an index fund vs a million investors throwing a million darts at a million newspaper stock pages. (Ignoring weighting/market cap, but the point is that a lot of investing was passive anyway) One experiences a lot less variability, bookkeeping and trading fees though.
  • freyr 7y ago
    Wouldn't this only be true if we were talking only about total market indexes? But most index funds aren’t total market funds.
  • kgwgk 7y ago
    > the point is that a lot of investing was passive anyway The discussion is about the part that was not passive. It’s about passive funds replacing active fund managers, not about passive funds replacing dart-throwing retail monkeys.
    • Scoundreller 7y ago
      I still assert that a lot of the active fund management was dart throwing anyway. As was retail investor’s selection of those active management funds. There’s a diff between « active » investing in a hedge fund that has an AI HFT bot, and « active » investing in Fidelity’s Value Fund.
      • zimablue 7y ago
        HFT isn't relevant in this context, you need a better example of an active fund that you think reliably makes money by holding, or at least making big trades over longer time periods. HFTs don't normally move the market, they're effectively just frontrunning, you're thinking of something like CTAs/long-short quants
        • throwawaymath 7y ago
          High frequency trading is not frontrunning. Neither the standard legal definition of frontrunning nor its conceptual underpinnings are applicable to high frequency trading. It's also common for market makers to move the market.
        • benj111 7y ago
          "HFTs don't normally move the market" HFTs make their money on the difference between the bid and ask prices. They can only exist because you're willing to sell at 10c, and I'm willing to buy at 11c. Hypothetically we could have traded directly lets say at 10.5c. So the HFTer has literally moved the market. Buying at a higher price would tend to a higher price anchor. If I paid 11c, I wouldn't want to sell at a loss, so your 10.9c offer would be rejected, where it might have been accepted if I'd paid 10.5c. But then ultra rational me would never buy above 12c and ultra rational you would never sell below 9c, based on current info, so irrespective of middlemen, the price would be bounded by those 2 figures. And there isn't net buying or selling pressure so you could treat the spread as a fee in return for providing liquidity. But yeah in practice, I think you're basically correct.
          • aaronblohowiak 7y ago
            Your description of HFT sounded a lot like a market maker to me — how would you describe the difference?
            • ycombobreaker 7y ago
              much HFT is market-making, they are labels on different axes. HFT is about system latencies and holding times. Market making is about an approach to trading.
  • Gpetrium 7y ago
    @otalp is likely talking about the distortion created by having a large % of overall investment made based on components of market index instead of hard data (e.g. financial statement of X company show below expected return, I will decrease investment). In other words, mass indexation can create market distortions depending on how they are structured.
  • RhysU 7y ago
    There is a difference. The S&P500, e. g., is not constructed by throwing darts.
    • Scoundreller 7y ago
      Which could be considered « active » since they have to look at the top 500, and add/remove as required in a manner that won’t cause a company dropping from 500 to 501 from becoming 600 because of a sell off. But that just goes to the point I’m making: there are varying degrees of active and passive funds. The rise of passive index funds won’t distort much of anything when funds were coming from a passive fund that tried to sell itself (and charge) as active.
  • jessriedel 7y ago
    There is a difference if individual investors largely don't bother to use their shareholder votes (meaning neutral influence) while index fund managers vote to collude (since it is worth their time to bother to vote carefully). Probably not a big difference, but hard to be sure.