Is There A Problem With Short Term Trading?

One thing that is interesting to me is the diatribes against short-term trading in markets.  If a trade is made and exited in the blink of an eye, does it hurt the company or the market?  A lot of people think it does.  I don’t.

When I made trades, I often scalped the market for a tick here and a tick there.  In the old days, you could pull down a pretty good living doing that.  Today, computers do it.  What if they weren’t there?

The bid/ask spreads on stocks and commodities would be a lot wider increasing the all-in cost to trade.

This is sort of a thing that sticks in my craw for some reason and another reason I don’t like the premise behind the Long Term Stock Exchange.  There is no conflict between long-term and short-term holders of stock.  They both want appreciation in price but are taking different strategies to get there.

Does short-term trading hurt stocks?

No.  All public information gets priced into a stock so if the stock is going to rise, the market will move it that way.  Even if someone tries to pump up, or depress the value of the stock in the short term the market will eventually win.  I had lunch with an old trader friend of mine yesterday and we were talking about this.  He said he remembered how he would take a big position in a market and the pit would try and punish him.  Eventually, they’d run out of bullets and the market would prove him right (if he was indeed correct in his initial position).  The turn of the market could often be violent because the people trying to fight it would have to cover.

One thing that is concerning to me about markets these days is that there might not be enough players in them engaging in short-term trading.   Short term players create liquidity.  Liquidity is good for markets.  Yesterday, we observed the 30th anniversary of the 1987 crash.  Virtually all the long-term players left the market that day or sold.  Most if not all the medium term players left too.  The only people that were left were the short term players.

We are concentrating a lot of liquidity in the hands of fewer and fewer short-term players.  When the market turns and the bear claws finally come out if they shut down, it will get ugly.

  • “there might not be enough players in them engaging in short-term trading.” The problem is not the traders — those who actually buy and actually sell — it’s the Fake Traders who are exploring other traders possible reactions to possible trades. Those who say they are willing to buy at some price, until they are offered a chance to buy at that price and they refuse. Or sell, with same non-sale result.

    You are certainly right about lower bid/asked spreads — in good times / normal times. But in really bad times, the computer traders just stop trading, and that makes the swings worse, when swinging.