Does the stock market really matter?

The_Animus said:
You have a whole slew of day traders or groups using sophisticated software to makes trades within seconds. These stock purchasers do not retain stock in any particular company for long, thus there is no investment in the company by them in any real sense. Nonetheless they can glean large amounts of money by buying in massive volume at differentials of just a few pennies. Do you feel that this type of trading is beneficial for companies or the economy in general?
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Yes.

These are essentially efforts to exploit a sort of temporal arbitrage. And absent some sort of monopoly power, efforts to exploit arbitrage inevitably reduce the size of that arbitrage. And that is actually a good thing for the rest of the market.

So for example, if a day trader thinks that the price of a stock will go up between today and tomorrow, he'll buy today and sell tomorrow. If he's right, he makes money off the trade. But think about what that does for the seller he bought from and the buyer he sold to. By increasing demand on the first day, he increased the price that today's seller can obtain. And by increasing supply on the second day he reduces the price that tomorrow's buyer must pay. So they're both better off because of his participation.
 
Ziggurat said:
So for example, if a day trader thinks that the price of a stock will go up between today and tomorrow, he'll buy today and sell tomorrow. If he's right, he makes money off the trade. But think about what that does for the seller he bought from and the buyer he sold to. By increasing demand on the first day, he increased the price that today's seller can obtain. And by increasing supply on the second day he reduces the price that tomorrow's buyer must pay. So they're both better off because of his participation.
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Thats would be an unreasonably slow rate at which to trade though. Modern High-frequency trading takes place on the millisecond range.
 
Ziggurat said:
But think about what that does for the seller he bought from and the buyer he sold to. By increasing demand on the first day, he increased the price that today's seller can obtain. And by increasing supply on the second day he reduces the price that tomorrow's buyer must pay. So they're both better off because of his participation.
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Fine and good in a non-competitive market but under competitive markets one of the most fundamental concepts is that no single buyer nor seller can affect the price of a good. Capital markets are pretty darn close to pure competition even though you will see an occasional Soros (currency) or Hunt brothers (precious metal). There ain't a day trader on the planet with enough resources to move the market and institutional investors won't do it because of the extreme risk involved.

Blue Horseshoe loves Anacott Steel
 
jazzmojo said:
Fine and good in a non-competitive market but under competitive markets one of the most fundamental concepts is that no single buyer nor seller can affect the price of a good.
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I doubt that's really a "concept" for most economists so much as an approximation. Furthermore, we're not even really talking about individual day traders, we're talking about day traders as a class.
 
geni said:
Thats would be an unreasonably slow rate at which to trade though. Modern High-frequency trading takes place on the millisecond range.
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The time frame I chose to illustrate my point was completely arbitrary, so that's OK.
 
Ziggurat said:
I doubt that's really a "concept" for most economists so much as an approximation. Furthermore, we're not even really talking about individual day traders, we're talking about day traders as a class.
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Well, so long as we continue to live in a universe governed by the Heisenberg uncertainty principle, everything is an approximation. Furthermore, day traders as a class never move in unison (that's called "collusion" and as the SEC will tell you, it is kinda sorta illegal).
 
Ziggurat said:
So for example, if a day trader thinks that the price of a stock will go up between today and tomorrow, he'll buy today and sell tomorrow. If he's right, he makes money off the trade. But think about what that does for the seller he bought from and the buyer he sold to. By increasing demand on the first day, he increased the price that today's seller can obtain. And by increasing supply on the second day he reduces the price that tomorrow's buyer must pay. So they're both better off because of his participation.
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Something doesn't add up there.

What about the person who would have bought it from today's seller, and the person who would have sold it to tomorrow's buyer, if the day trader weren't around? The effect on them would be the opposite.

Overall, if the stock goes up in price between today and tomorrow, and the day trader makes money because he holds the stock during that period, then, in his absence, someone else would have held the stock during that period, and would have made the money instead.
 
geni said:
You don't actualy need anything resembling a modern stock market to do that. Just look at the the trade in stamps if you want a modern example.
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Why on earth would we do that when we have a exact modern example - the stock market?

Look at what happens to a company when it gets downgraded to the pink sheets. While some thrive quite well there, for the others it is a huge hardship. The less liquid the market, the larger the variance between the stock price and the value of the company. More importantly, the less liquid the market, the higher the bid/ask spread on the stock. This costs people money. It gets much worse when stocks are held in private hands only - try finding a buyer for a 5MM share block. You can guess at what a discount these usually sell at. The upshot of all of that is that the value of the business has to change a huge amount (20% say) to make a buy/sell round trip remotely possible. It also means that once you sell you are locked in.

I once bought huge blocks of a company on the pink sheets. I got them for a screaming deal. Every time I tried to sell them off I was basically creating the market, because I was offering far more stocks than anyone wanted to buy. So, I had to trickle them back into the market - with all of the attendant transaction costs. I ain't rich; this was a cheap stock. However, the same holds true for the rich people holding millions of shares of a mid price stock. When you try to unload or buy huge blocks, the prices change dramatically. In the end I made out well, but not nearly as well as the raw numbers might suggest. Everytime I sold the price jumped up.Then I had to wait for it to drift down over a week or more. Meanwhile company news keeps coming out, and the prices react to that. Etc. Pain in the arse. Never again.

If it is not clear, the stamp market is an egregiously bad example because you don't have a market maker in stamps, stamps are not claims on future cash flows, and most people are collectors, not investors.
 
69dodge said:
Something doesn't add up there.

What about the person who would have bought it from today's seller, and the person who would have sold it to tomorrow's buyer, if the day trader weren't around? The effect on them would be the opposite.

Overall, if the stock goes up in price between today and tomorrow, and the day trader makes money because he holds the stock during that period, then, in his absence, someone else would have held the stock during that period, and would have made the money instead.
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Yes, someone else missed out on those short-term profits that the day-trader captured.

But because the arbitrage was reduced, the size of that profit was reduced. By trying to exploit short term fluctuations in prices, day traders also help to decrease those short-term fluctuations. And the more those short-term fluctuations decrease, the better it is for long-term investors. As a class, their net profits might not be any better (and might be slightly worse) because of day traders, but their risk is reduced, and that provides an economic benefit.
 
roger said:
Everytime I sold the price jumped up. Then I had to wait for it to drift down over a week or more.
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Have you accidentally reversed "up" and "down" here?

I figure, first, if the supply increases, the price should decrease, and, second, if you were selling, you'd be happy if the price went up.
 
69dodge said:
Have you accidentally reversed "up" and "down" here?

I figure, first, if the supply increases, the price should decrease, and, second, if you were selling, you'd be happy if the price went up.
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Yes, I'm a dumbass. Thanks for catching that.
 
jazzmojo said:
Fine and good in a non-competitive market but under competitive markets one of the most fundamental concepts is that no single buyer nor seller can affect the price of a good. Capital markets are pretty darn close to pure competition even though you will see an occasional Soros (currency) or Hunt brothers (precious metal). There ain't a day trader on the planet with enough resources to move the market and institutional investors won't do it because of the extreme risk involved.

Blue Horseshoe loves Anacott Steel
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I don't think this holds for the stock market - which in reality is a form of auction. One buyer can change the price if they are willing to pay more for the stock than another. One buy or seller can have quite an effect on the price if the share is somewhat illiquid as well.

69dodge said:
Something doesn't add up there.

What about the person who would have bought it from today's seller, and the person who would have sold it to tomorrow's buyer, if the day trader weren't around? The effect on them would be the opposite.

Overall, if the stock goes up in price between today and tomorrow, and the day trader makes money because he holds the stock during that period, then, in his absence, someone else would have held the stock during that period, and would have made the money instead.
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There may not have been another buyer at the time the seller wanted to sell though.
 
Last of the Fraggles said:
I don't think this holds for the stock market - which in reality is a form of auction. One buyer can change the price if they are willing to pay more for the stock than another. One buy or seller can have quite an effect on the price if the share is somewhat illiquid as well.
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Yes, you don't have to be a multi-millionaire to affect the price of a small-cap company. However, to have a noticeable effect on, say, Wal-Mart shares, you need to have a lot of $$$. To have a noticeable effect on the entire market, you need to have Warren Buffett team up with the Sultan of Brunei.
 
geni said:
By your argument the majority of canals would have been unable to raise money through the sale of shares since they predate the London stock exchange. This was clearly not the case.
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So you are okay with there being a stock market (in a general sense) but don't want there to be convenient stock exchanges?
 
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