4 ms·

While "day trading is an objectively terrible investment strategy" for most, having more people in the market and market participants being more fluid in their

by waych 5y ago

While "day trading is an objectively terrible investment strategy" for most, having more people in the market and market participants being more fluid in their investments than not, is strictly more efficient than a market with less participants who act more illiquid in their positions.

wolverine876 5y ago
Imagine a market of 1,000 people. If we add 5,000 who significantly under- or overvalue, or make other errors, the good being traded, is that more efficient? In terms of economic efficiency, if that's what we mean, I would guess not: It causes the misallocation of capital to worse investments. Was the Gamestop market economically efficient?
- waych 5y ago
  You are making the assumption that the first 1000 people somehow had a better way to value the assets being trading than the next group that joins the trade. This is a fallacy as the market sets the prices on its own. No by efficiency I mean the spread and incorporation of more information relating to the underlying asset, making it more closely match their fair value, and the resulting tightening of the spread and reduced volatility overall. See Efficient Market Hypothesis. It is also worth noting that it is this same hypothesis that backs the "index funds are better than stock picking" argument.
  - elliekelly 5y ago
    Are the new traders introducing more information to the market? Or are they introducing noise?
    - pie420 5y ago
      Even more interestingly, for relatively cheap, you can spread rumors or seed sentiments into the internet via paid shills, so for small amounts of money you can sow false information and cult-like mentalities around certain stocks, and profit off those. If anything, that counts as anti-information, and makes the market less "efficient", except to those who are using the market variance as a means to extract wealth from retail investors.
    - waych 5y ago
      You misunderstand. The information is there, constant, regardless of how many participants are in the market. The addition of new participants helps spread, judge and value the information, more than fewer participants, which allows the information to be better incorporated into the price, resulting in a more efficient (fair value) market. As a result, the asset becomes more liquid and "fairly priced". There is no "real price" for assets that are market valued, only whatever the market will bare. Market efficiency is about more and more participants agreeing on the going price for an asset. While this overall global disagreement on price can never be captured completely, its state is reflected by the going price and the amount of spread (difference between ask and bid price). A big part of efficiency is being able to ask yourself how much return can you expect if you were to sell the asset right after you bought it. High efficiency, and you can expect to be able to get your money back with high certainty. Let's use an AAPL stock as an example. If I bought on today at it's low, it would have cost me $135.76. If I wanted to sell it, its be super easy. The closing spread was ask 136.96 bid 136.60, or .36/136.60 = ~0.26%, so if I bought and sold into that market as fast as they could, that is around how much I could reasonably expect to lose. The high liquidity and small spread makes that asset easy to move at low overhead cost, hence more efficient. Compare that to wanting to buy an asset in a much less efficient market, for example real estate. Buying is not an efficient process. Not only does it take time to close, but there are overheads in both time and money that helps slow everything down and increase costs. There are much fewer participants. Not every house is the same, but also not every house is for sale. If you buy a house, you have very low certainty that you can easily sell that house right away and get your money back completely, at least least not without some other factors (time, money) put in. If you don't like real estate as an example, consider private equity, where one is subjected in 5, 10, 20+ year lock ins of large sums of money, to buy into slices of partnerships or joint venture funds, where really one has no idea how much their investments are valued until many years later because there is no market for what they bought until everyone gets to cash out in the future. Never mind the equity fund capital calls which make you question whether your investments have indeed gone past zero and are now negative. Low efficiency doesn't translate into loses though, just like high efficiency doesn't translate into gains. The two are independent. Low efficiency however is rife with opportunity. There is very little chance one can sell $AAPL stock at much above the going fair market value on the exchange. The same can't be said for low efficiency real estate, where it's easier to make a living off the inefficiencies in the market e.g. flipping property to the less educated new participants in that market.
  - wolverine876 5y ago
    > I mean the spread and incorporation of more information relating to the underlying asset, making it more closely match their fair value The Internet isn't so great at spreading information; it is incredible at disinformation and misinformation.

by waych 5y ago

wolverine876 5y ago

Imagine a market of 1,000 people. If we add 5,000 who significantly under- or overvalue, or make other errors, the good being traded, is that more efficient? In terms of economic efficiency, if that's what we mean, I would guess not: It causes the misallocation of capital to worse investments. Was the Gamestop market economically efficient?

waych 5y ago
You are making the assumption that the first 1000 people somehow had a better way to value the assets being trading than the next group that joins the trade. This is a fallacy as the market sets the prices on its own. No by efficiency I mean the spread and incorporation of more information relating to the underlying asset, making it more closely match their fair value, and the resulting tightening of the spread and reduced volatility overall. See Efficient Market Hypothesis. It is also worth noting that it is this same hypothesis that backs the "index funds are better than stock picking" argument.
- elliekelly 5y ago
  Are the new traders introducing more information to the market? Or are they introducing noise?
  - pie420 5y ago
    Even more interestingly, for relatively cheap, you can spread rumors or seed sentiments into the internet via paid shills, so for small amounts of money you can sow false information and cult-like mentalities around certain stocks, and profit off those. If anything, that counts as anti-information, and makes the market less "efficient", except to those who are using the market variance as a means to extract wealth from retail investors.
  - waych 5y ago
    You misunderstand. The information is there, constant, regardless of how many participants are in the market. The addition of new participants helps spread, judge and value the information, more than fewer participants, which allows the information to be better incorporated into the price, resulting in a more efficient (fair value) market. As a result, the asset becomes more liquid and "fairly priced". There is no "real price" for assets that are market valued, only whatever the market will bare. Market efficiency is about more and more participants agreeing on the going price for an asset. While this overall global disagreement on price can never be captured completely, its state is reflected by the going price and the amount of spread (difference between ask and bid price). A big part of efficiency is being able to ask yourself how much return can you expect if you were to sell the asset right after you bought it. High efficiency, and you can expect to be able to get your money back with high certainty. Let's use an AAPL stock as an example. If I bought on today at it's low, it would have cost me $135.76. If I wanted to sell it, its be super easy. The closing spread was ask 136.96 bid 136.60, or .36/136.60 = ~0.26%, so if I bought and sold into that market as fast as they could, that is around how much I could reasonably expect to lose. The high liquidity and small spread makes that asset easy to move at low overhead cost, hence more efficient. Compare that to wanting to buy an asset in a much less efficient market, for example real estate. Buying is not an efficient process. Not only does it take time to close, but there are overheads in both time and money that helps slow everything down and increase costs. There are much fewer participants. Not every house is the same, but also not every house is for sale. If you buy a house, you have very low certainty that you can easily sell that house right away and get your money back completely, at least least not without some other factors (time, money) put in. If you don't like real estate as an example, consider private equity, where one is subjected in 5, 10, 20+ year lock ins of large sums of money, to buy into slices of partnerships or joint venture funds, where really one has no idea how much their investments are valued until many years later because there is no market for what they bought until everyone gets to cash out in the future. Never mind the equity fund capital calls which make you question whether your investments have indeed gone past zero and are now negative. Low efficiency doesn't translate into loses though, just like high efficiency doesn't translate into gains. The two are independent. Low efficiency however is rife with opportunity. There is very little chance one can sell $AAPL stock at much above the going fair market value on the exchange. The same can't be said for low efficiency real estate, where it's easier to make a living off the inefficiencies in the market e.g. flipping property to the less educated new participants in that market.
- wolverine876 5y ago
  > I mean the spread and incorporation of more information relating to the underlying asset, making it more closely match their fair value The Internet isn't so great at spreading information; it is incredible at disinformation and misinformation.