Amein,
I challenged you to find a counter example to the proposition that MMs have a stabilizing influence on the market when their trades are profitable. The example you posted doesn't provide a valid counter example. The price ranges from a high of $70 to a low of $60. Your MM sells shares at an average price of $67.50 and begins to rebuy after the price falls to $60. This means that he is selling, on average, when the price is high (average=$65), and buying when it is low. Such actions are price stabilizing (variance reducing) as I explained in my previous post.
The argument I made about MMs is one that economist Milton Friedman made years ago in a different context. The issue back then was whether commodity speculators have a destabilizing effect on the markets. Do speculators in oil futures, for example, drive up the price of oil? Friedman contended that the answer is no, provided only that the trades of speculators are profitable. He contended that it is only speculators who lose money whose trades destabilize prices. An example of the latter (not Friedman's) may be the Hunt Bros ruinous venture into the silver market in the 1970's. No question the Hunts destabilized silver prices. But they also lost a fortune. They bought silver when the price was high, something like $15-$40 as I recall, (making it artificially scarce), and then they later dumped it, much at prices below $10. This produced a glut when it was already plentiful. Of course, the Hunts paid for their poor judgment (poor forecasting ability) but not before imposing considerable social costs on producers and industrial users of silver.
Anyway, Friedman offered a challenge to anyone who believes speculators drive up (average) prices of commodities. Show him an example of how this can be done profitably. I'm unaware that anyone was ever able to meet the challenge.
Geoff |
