Imagine a society in which all but 10 individuals invest a fixed percentage of their income money in an index fund that in turn buys shares of any publicly listed firm in proportion to its market capitalization. The remaining 10 trade actively. For simplicity, assume that the necessary purchases and sales are done every day at market opening, based on the data from closing at the previous day.
The ten active traders would determine those market capitalizations; everyone else would be along for the ride. If that group of ten colluded, they could extract money from the passive traders conducting straw purchases of a stock to inflate its price (and thus market cap), triggering the index fund to buy it, at which point they can take a profit and divide the spoils among themselves.
This is obviously hugely stylized and exaggerated. But clearly, at some point between no passive investment and overwhelming passive investment, there is a strategic tipping point.
Politically, we have to ask why the mass of passive investors should allow private traders pursuing short term profit maximization strategies to determine the allocation of investment in our society. Wouldn't every vision of the good life be better served by democratically electing the bodies that make the major investment decisions that determine our economic direction, returns to labor, basic infrastructure, etc?
This is not how it works. There is really no such thing as a passive investment. Passive is really the world's simplest active investors. All they do is ask, did you give me money? Then I buy. Did you ask for money? Then I sell.
This is important because in your example of only 10 actually active investors remaining, the net flow of the passive investors will dominate the market.
If the net flow is positive, stocks will trend to infinity and the firm will continually issue more stock. This is what AMC is doing already. If net flows are negative, stocks will trend to zero, and likely the firm will either have money and go private, or be in debt and go under.
No, governing bodies generally do not make better decisions than the people who have an actual stake in their investments. Passive investment is a trend, poor performance would drive people back to active management, and vice versa.
I think if any large player in the market or the entire market acts in any sort of trivially predictable way then you can extract money from it by manipulating it.
Wouldn't the value of any stock not included in a fund be almost worthless or un-tradable? I am assuming that day trading is referring to the buy/selling of individual stocks by anyone other than a fund.
With a quick search, I couldn't find the percent volume due to day traders vs institutional and regular retail traders. I think it depends on how much dollar volume they contribute. I feel like it's a relatively small percent compared to institutional trading (algorithmic and manual). I also don't see everyone switching to index funds anytime soon -- people want to get rich quick.
If you include algorithmic trading I think volatility would be reduced because it would be spread over a longer time frame. But that's probably all. Individuals and institutions would still pick individual stocks to try to beat the market, just over a longer time frame.
If all money (or a significant portion) was only invested in index funds, liquidity of individual stocks would decrease. That would result in a counterbalancing increase in volatility.
> I think it depends on how much dollar volume they contribute.
Generally this is the common view on institutions, but the term "whales" is also common and indicates positional leverage (vs. identity leverage) in understanding market flow.
You/op may want to go upmarket and talk to firms about this for research purposes.
> I also don't see everyone switching to index funds anytime soon -- people want to get rich quick.
Whether intentional or not, this phrasing suggests the quintessential beginner's mindset on a thing they are new to: Either people go the way I'm comfortable seeing things, OR they represent the completely opposite mindset to my own.
There is also another false dichotomy tucked in here, one which leads many market-beginners to undershoot or overshoot appropriate risk mindsets.
It is actually very common for a trader to be simultaneously a day trader, swing trader, and investor depending on the part of their capital they are working on in a given moment on a given day. For example they might manage up/down an investment position, open a swing, and hold off on a given day trade--all on the same day.
Beating the market is also a really ineffective mental model for understanding what traders are trying to do with their trading systems. It is commonly used as a straw-man theme to perpetuate an argument over unrealistic risk stereotypes.
Individual traders may post in retrospect that they beat a market, but usually their goal specification has nothing to do with beating a market. While the goal may thus seem to overlap in a hand-wavy way, the usual specification they work from yields specific leverage that helps _specific_ traders beat markets because the spec is more like running a quality trading system in a subjective manner.
A market's efficiency would increase if traders who is less informed than the average starts index investing instead of trading (poorly). If traders who actually have more information than average go into index investing, you actually might lose market efficiency (by not trading positions that they could profit off more than passive investing).
An increase in market efficiency means the prices of the equities match their true value faster.
What you should be asking is what happens when everyone sells their index funds at once?
(I'll tell you again, just like I told you before I tried to throw an apple at Bill Gates' house from a party boat full of neoliberals: one of the largest drops in the stock market since the 1920s, complete with a plague and Prussia or whatever going buck wild.)
[+] [-] bwestergard|3 years ago|reply
The ten active traders would determine those market capitalizations; everyone else would be along for the ride. If that group of ten colluded, they could extract money from the passive traders conducting straw purchases of a stock to inflate its price (and thus market cap), triggering the index fund to buy it, at which point they can take a profit and divide the spoils among themselves.
This is obviously hugely stylized and exaggerated. But clearly, at some point between no passive investment and overwhelming passive investment, there is a strategic tipping point.
Politically, we have to ask why the mass of passive investors should allow private traders pursuing short term profit maximization strategies to determine the allocation of investment in our society. Wouldn't every vision of the good life be better served by democratically electing the bodies that make the major investment decisions that determine our economic direction, returns to labor, basic infrastructure, etc?
https://www.tandfonline.com/doi/full/10.1080/08935696.2022.2... https://thenextsystem.org/node/204
[+] [-] ItsMonkk|3 years ago|reply
This is important because in your example of only 10 actually active investors remaining, the net flow of the passive investors will dominate the market.
If the net flow is positive, stocks will trend to infinity and the firm will continually issue more stock. This is what AMC is doing already. If net flows are negative, stocks will trend to zero, and likely the firm will either have money and go private, or be in debt and go under.
[+] [-] incrudible|3 years ago|reply
[+] [-] shpx|3 years ago|reply
[+] [-] joehx2|3 years ago|reply
The inverse is true - the more people that stock pick, the more opportunities exist for index funds.
So, yeah, there's definitely a balancing act between the two.
[+] [-] strangattractor|3 years ago|reply
[+] [-] joehx2|3 years ago|reply
[+] [-] daveguy|3 years ago|reply
If you include algorithmic trading I think volatility would be reduced because it would be spread over a longer time frame. But that's probably all. Individuals and institutions would still pick individual stocks to try to beat the market, just over a longer time frame.
If all money (or a significant portion) was only invested in index funds, liquidity of individual stocks would decrease. That would result in a counterbalancing increase in volatility.
It's an interesting what-if scenario.
[+] [-] themodelplumber|3 years ago|reply
Generally this is the common view on institutions, but the term "whales" is also common and indicates positional leverage (vs. identity leverage) in understanding market flow.
You/op may want to go upmarket and talk to firms about this for research purposes.
> I also don't see everyone switching to index funds anytime soon -- people want to get rich quick.
Whether intentional or not, this phrasing suggests the quintessential beginner's mindset on a thing they are new to: Either people go the way I'm comfortable seeing things, OR they represent the completely opposite mindset to my own.
There is also another false dichotomy tucked in here, one which leads many market-beginners to undershoot or overshoot appropriate risk mindsets.
It is actually very common for a trader to be simultaneously a day trader, swing trader, and investor depending on the part of their capital they are working on in a given moment on a given day. For example they might manage up/down an investment position, open a swing, and hold off on a given day trade--all on the same day.
Beating the market is also a really ineffective mental model for understanding what traders are trying to do with their trading systems. It is commonly used as a straw-man theme to perpetuate an argument over unrealistic risk stereotypes.
Individual traders may post in retrospect that they beat a market, but usually their goal specification has nothing to do with beating a market. While the goal may thus seem to overlap in a hand-wavy way, the usual specification they work from yields specific leverage that helps _specific_ traders beat markets because the spec is more like running a quality trading system in a subjective manner.
[+] [-] chii|3 years ago|reply
An increase in market efficiency means the prices of the equities match their true value faster.
[+] [-] _boffin_|3 years ago|reply
[+] [-] LunarAurora|3 years ago|reply
Isn’t the outcome really dependant on the (parent) investement companies' distribution/concentration?
What happens to non-indexed stocks ?
[+] [-] faangiq|3 years ago|reply
[+] [-] greggarious|3 years ago|reply
(I'll tell you again, just like I told you before I tried to throw an apple at Bill Gates' house from a party boat full of neoliberals: one of the largest drops in the stock market since the 1920s, complete with a plague and Prussia or whatever going buck wild.)