Where do they get these idiots?
Thursday March 29, 7:48 pm Eastern Time
SmartMoney.com - Tradecraft
Liquidity Is for Losers
By Jonathan Hoenig
NO MATTER AT what level you play the trading game, you've got to understand what business you're really in. And when you buy XYZ Widgets at 90, you aren't getting into the widget business. You're getting into the business of providing liquidity to a company's float — in this case, XYZ above 90.
(doubletalk)
What moves stocks, bonds or anything else is the relationship between demand and supply. By definition, traders and speculators profit by adding liquidity to illiquid markets.
This is such a ridiculous claim that the guy obviously never went to school.
Doesn't matter if it's Cisco Systems (NASDAQ:CSCO - news) or soybeans, traders narrow the spreads between the price at which someone's willing to sell and the price at which someone else is willing to buy, bringing down the cost of execution. Trading isn't about predicting the future, but about gaming the liquidity demands for a particular security.
"about gaming the liquidity demands for a particular security"? The liquidity demand for any security is zero. Liquidity demand is an absurd notion. Maybe he means money rather than "liquidity". I'm sure he doesn't know the difference.
Generally speaking, I want to be long illiquid markets and short liquid markets.
He must be kidding. He means long high demand inelastic markets and short high supply inelastic markets. Nothing to do with liquidity.
First, a little background. You can't imagine how drastically the liquidity picture has changed in just a few short years. Back in the early 1990s, when most market pros still referred to the Nasdaq as the ``over-the-counter'' market, stocks traded in eighths. That meant there were only eight ``price points'' within a particular dollar increment in which you could own Nasdaq stocks. And while 12.5 cents — one-eighth of a dollar — was the minimum spread between every price fluctuation, many stocks traded with half-point spreads or more. With mutual funds exploding in popularity and a huge influx of Internet-driven retail trade, this made making markets a very profitable business. In a sense, you had a big ``edge'' on every trade.
Is this guy for real? He believes in a concept that you occasionally hear among tyros.
Now the moment someone else makes speculative capital available to make markets, he's slicing off a piece of the liquidity pie.
This collection of words is non sequitir or simply incoherent although it does pretend to be a sentence.
As competition to make markets grows, spreads become more narrow and there's less opportunity to make money by making markets.
False. The stability of expected return rises and so one only needs to increase the velocity of turnover to increase revenues which is possible because of the stability.
As the spread between the bid and offer gets smaller, so does the profit margin that comes from trading in that particular security.
You don't need a Harvard MBA to know that highly liquid industries are competitive,
Nothing could be further from the truth. There are many, probably most, industries where this isn't the case.
and competition is what brings down the cost of goods to consumers. It's what makes other mature industries like retail or restaurants so difficult.
Wrong or non sequitir. Location, cost of entry, size, marketing visibility, product differentiation, operating efficiency, are the factors which enable the mature restaurant business to be so effective. Competition helps profitability by forcing everyone to be better.
In an effort to gain market share, companies cut prices. Their sales expand, but their margins shrink. The only reason McDonald's (NYSE:MCD - news) can make any money selling burgers for 49 cents is because they sell hundreds of millions a year. What they lose in margin they make up for in volume. Cutthroat competition is terrific for the consumer, since it brings prices down. That's great when you're buying hamburgers — but nightmarish when you're buying stocks for ``the long haul.''
Business profit margin and stock price performance are little correlated. A company improving margins ceteris paribus will be a little more profitable. It's hard to separate that out of price action noise.
This same maturation toward efficiency, competition and liquidity has occurred in the stock market over the past 10 years. As money has flowed into stocks, the Nasdaq hasn't just become more liquid...but sopping, dripping wet — even after its 60%-plus decline.
This isn't true in the least, but let's go along with it for the ride.
How liquid has the Nasdaq become? According to the statistics complied by the National Association of Securities Dealers, spreads on Nasdaq stocks have fallen by over 75% in the past nine years. In 1992, the average relative spread was slightly above 1.70%. By September 2000, it had fallen to only 0.22%. Today, most Nasdaq stocks trade in 1/16th increments, with the typical spread being about 14 cents. Large-cap names routinely trade in increments of 1/256th, on average OTC volume of well over 1.5 billion shares. Decimalization will bring down spreads even further.
Now he equates "liquidity" with spreads across markets. Unbelievable.
As markets become more liquid, traders must make up for small margins (small bid/ask spreads), by trading huge volume, and while I run a hedge fund, like most investors, I'm a small fry compared to the big boys. Think of it this way: When spreads were an eighth, if you snapped up a stock at 10 1/4, the least it could rise to was 10 3/8. So you didn't have to be particularly right, or trading in particularly high volume, to make some money.
This little boy has brains confused with a bull market.
But there's less incentive to provide liquidity to markets that don't need it, like large caps on the Nasdaq today. If I bid for 10,000 shares of WXYZ at 15, someone else is simply going to bid .004 of a cent (1/256) higher. It's just not enough gravy in my book. I've either got to be right (that is, the stock has to go up) a lot more, or I have to trade in much higher volume to make any money.
He's saying he has to predict the future or scalp, but he runs a hedge fund which is contrary to either of these approaches.
The history of Internet stocks provides an object lesson in liquidity. What drove these stocks higher in the early years was that there were very few ways to get Internet exposure in 1995. While analysts suggested that ``first-mover advantage'' was huge, the real reason Internet stocks performed so well wasn't because of their business prospects, but because of the supply/demand picture for the stocks themselves. Lest we forget, among Yahoo! (NASDAQ:YHOO - news), Amazon.com (NASDAQ:AMZN - news), (then independent) Netscape and America Online (now AOL Time Warner (NYSE:AOL - news) but then trading on the OTC under ticker ``AMER'') there were only a few Internet stocks — but tons of investor interest. If you wanted to own the future, you had only a couple choices. Remember when K-TEL (OTC:KTEL - news) or Zapata were seen as legitimate ``Internet plays'' that would own their respective markets? What happened, of course, is that the supply began to outstrip demand. As more issues came to market and companies learned how to embrace new technology, the demand for so-called pure-play Internet stocks evaporated. Somewhere down the line we realized that every company is an Internet stock.
This imbecile runs a hedge fund? He must have $50k in total assets! |
