71–80 of 358 posts
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HFT is very efficient. Individuals will simply not beat HFT unless they actually have insider information.
I believe the comment was talking about any kind of active trading (i.e. picking individual stocks to buy and sell), not only HFT, which uses millisecond fluctuations in security price to make a profit.
Here's a question for someone more savvy than me. What happens if the vast majority of stock investments end up in vanguard funds? In an economic crises, will everyone try to sell the same set of funds and will crash the funds themselves?
This doesn't answer your question directly, but Matt Levine has written some great articles, in particular, about index funds and their effect on the market. Here's one: [1] "Second: One of my little stock-market obsessions is that index funds free-ride on the work done by active investors. Someone needs to make decisions that allocate capital to businesses. A world in which everyone indexes, and in which no one thin…
For one, the stock price of a company has no direct bearing on its capital. Only at IPO time or when a company is raising additional capital is the stock price relevant for the capital. E.g. Google's stock price has increased 15x since their IPO, but that has had no effect on their capital. Any other time besides the IPO and when raising additional capital, it is just money changing hands between stockholders, the company doesn't see any of that. Of course, the initial investors often only invest in the capital with the understanding that they will be able to easily sell their shares later. And there are some secondary concerns: employees might have stock or stock options, stockholders can influence the board and hence management, and too low a stock price might engender a hostile take-over.
Secondly, the market is frequently very wrong about pricing stocks. It was happily 'allocating capital' to internet stocks during the dot-com bubble, to financial stocks up to 2008,... A metaphor created by Benjamin Graham, and often repeated by Warren Buffett, is that of Mr. Market [1]: a manic-depressive fellow who has periods when he pays way too much for stocks at certain points and sells stocks at way too low prices at others.
That said, it mostly works. To a company it doesn't really matter all that much that the stock market undervalues your stock by 20-30% or more at some times (a good opportunity for share buybacks!), and overvalues it at other times (a good time to raise additional capital, or use your stock for takeover bids of undervalued companies). Of course, companies often do exactly the opposite: share buybacks when their stock is overvalued and takeovers overvalued companies when their own stock is undervalued...
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> With index funds so big, who determines prices? ... At some point, this has to create problems, but so far it hasn't. Any active trader remaining in the market. Fortunately, active traders still make up a large part of the market. And the bigger indices grow, the larger the opportunities for active traders to profit. It's not a real problem — it's self-correcting.
> And the bigger indices grow, the larger the opportunities for active traders to profit. I'm having trouble understanding why this is the case. Care to clarify?
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You can't sell without having someone buying.
Hence why the price goes down until someone does.
Earlier quoted context omitted.
> With index funds so big, who determines prices? ... At some point, this has to create problems, but so far it hasn't. Any active trader remaining in the market. Fortunately, active traders still make up a large part of the market. And the bigger indices grow, the larger the opportunities for active traders to profit. It's not a real problem — it's self-correcting.
> And the bigger indices grow, the larger the opportunities for active traders to profit. I'm having trouble understanding why this is the case. Care to clarify?
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You've got to take in to account that Vanguard doesn't actually do much - just buy stocks on your behalf and charge 0.12% for doing so. If it stopped doing that because some other operator was doing it for 0.08% it wouldn't be a big deal. The bigger deal would be if the general market collapsed for some reason but that would affect everyone, not just Vanguard.
Ok. I'm curious why you're telling me this. What's your motivation? There's certainly no point in arguing with me, since I'm both reasonably poorly informed and aware of it; I have made no bones about the fact that my post was unserious. Yet you leap to the defense of what should, after all, be a very unexciting thing. And you aren't alone in doing so. That, like this breathless article, is mildly troubling to me. Th…
But I was just pointing out they offer a rather dull, value for money service and are not going to collapse Enron style. They could decline Sears style however.
I'm fascinated at how Vanguard's essential idea plays out over the long term. The basic value proposition seems to be that Wall Street is extracting more value in fees than they're making in smart stock picks. Which thus far has been pretty accurate, but is the contribution of stock pickers actually zero? Is it negative ? Where do we reach a fixpoint, and how? Do the stock pickers, clever scamps that they are, figure…
I think a few stock pickers are really good at their jobs while a lot of others are mediocre to plain bad. The problem is that the ones that are consistently good are usually boutique hedge funds not open for normal people, some of them like Renaissance Tech only invest their own money and take no external funds anymore. Part of this is that their edge only works if their moves don't alter the market too much and for…
Dunno. Maybe the wealthy have access to wonderful investments we don't; I certainly wouldn't know.
I'm fascinated at how Vanguard's essential idea plays out over the long term. The basic value proposition seems to be that Wall Street is extracting more value in fees than they're making in smart stock picks. Which thus far has been pretty accurate, but is the contribution of stock pickers actually zero? Is it negative ? Where do we reach a fixpoint, and how? Do the stock pickers, clever scamps that they are, figure…
You might want to consider the boring scenario: maybe there are fewer professional traders, but their computer models improve, so prices get set as efficiently as before and maybe better.
Of course. There wasn't a significant recession since 2009. It is psychologically very easy to buy into a rising market. When the next (inevitable) correction happens, the tide will change and stock pickers will return to the spotlight. (It might be not rational, of course. But markets are never rational. They are efficient — efficient in projection of our hopes and fears).
Beautifully said
Earlier quoted context omitted.
> With index funds so big, who determines prices? ... At some point, this has to create problems, but so far it hasn't. Any active trader remaining in the market. Fortunately, active traders still make up a large part of the market. And the bigger indices grow, the larger the opportunities for active traders to profit. It's not a real problem — it's self-correcting.
> And the bigger indices grow, the larger the opportunities for active traders to profit. I'm having trouble understanding why this is the case. Care to clarify?