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Pastimes : Clown-Free Zone... sorry, no clowns allowed
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To: Tommaso who wrote (136841)12/3/2001 10:39:43 AM
From: GraceZ  Read Replies (1) of 436258
 
Frictional costs aren't the reason that short term trading has a negative expected return, although obviously it contributes to the reason traders run out of chips. The reason is because the market makers, by the nature of creating a continuous market, have a positive expected return. They are forced into holding the opposite of the public action. Say like when a stock gaps up hard or down at the open by public action that is essentially one sided. The buying or selling runs down or up through the booked orders. If it continues in that direction the mm is forced into a position of buying or selling at the extremes of the short term movement. Unless there is are subsequent waves of buying or selling they just bought or sold the point at which the stock changes direction. This effect accumulates day in and day out to create the positive expected return, the public holds the other side which is negative.

This doesn't mean that public traders can't mimic the role of the mm and win for long periods of time, they do but the greatest majority go bust and for most it is just a matter of making enough transactions. The ones who get to keep the money are the ones who quit while they are ahead or funnel their winnings into investments.
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