Originally posted by: jjsole
Originally posted by: Hooobi
Originally posted by: jjsole
One way in which it's obviously bad for the economy is the effect such exaggerated market volatility has on investor confidence. I'm sure you realize, simply by watching Bush's repeated efforts to reassure investors, that investor confidence is very important to maintaining a stable economy. How can anyone be confident about a market in which the stock markets swing wildly back and forth, often on a daily basis, with no rhym or reason?
They were pretty confident when it was swinging back and forth on the way up during the 90's but here's some rhyme and reason: Accounting scandels and the largest bankruptcies in the history of the US. Earnings restatement. The whole communications sector is practically going belly up from over-investment. Plenty of rational reasons to justify increased volatility...and none of these are due to daytrading. The moves aren't exagerated, and the daytraders didn't put the markets at the record levels that they were at either.
Actually, those scandals and bankruptcies are a good example of what too little regulation will do. Everything seems fine for the longest time because no one is really looking at it. Then, all of a sudden, you start thinking "why the hell wasn't anyone regulating this?" and by then it's a bit late. And I would even say that day-trading contributed to the likelihood of such scandals and bankruptcies because, for a while there, nobody cared any more about company fundamentals and people stopped scrutinizing balance sheets so they could get a running start and hop on the bandwagon...
This is true, but again it does lead to these online traders. It was (and is) about institutional greed, not the little guy. The daytrader didn't make the underwriter greedy, nor did he make the underwriter require his investors to buy shares at inflated prices after the initial offering started trading. The daytrader also didn't create the greed that produced the conflict of interest between analysts and investment banking business. There are alot of complex issues that have contributed to many tough financial issues that exist in todays headlines, but daytrading isn't the source of woes for either of them...only perhaps a symptom at best, a symptom of capitalism. Greed drives capitalism, an it also undermines it if not paralyze it at times.
Those institutions were around a long time before everyone started day-trading and they'll be around long after most day-traders scamper off, licking their wounds.
Furthermore, you would be surprised at the effect individual day-traders, as a group, can have on the market. If memory serves me, during the height of the tech bubble, individual day-traders accounted for a majority of shares traded on the Nasdaq on a daily basis. This is in part because such traders sit there and will hop into the market for a couple of thousand shares, then hop out, then short, then cover and do this over and over for a number of stocks on a typical day. Institutions will often initiate a buy or sell program once or twice a day, and though the blocks are huge, they do not equal the shares "churned" all day long by day-traders. This may have changed in the recent past, but it was true at the time.
You do make a good point about analysts. Although "investors" are partly to blame for that as well. After all, if you're a shepard and thousands of sheep are begging you to be led to the slaughter... it's gotta be tough to turn them away. I think there are two ways this problem needs to be solved:
1. Investment houses need to be made liable in some way for their analysts' statements. Not necessarily through fines or regulation, but at least through some type of scoring system (to keep track of analysts' performance) and requirements for
full disclosure of their positions in any stock discussed as well as scrutiny of any actions they take which are out of line with their analyst's "opinions"
2. Investors need to become more aware of these institutions' vested interest in what their analysts are doing.
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