7/11/2013

The stock market – from a child to a Frankenstein

Not too long ago, there was this official wisdom floating in the air. Invest your money in stocks, in the long term, do not speculate, and your money will grow faster than any kind of investments. It will definitely be better than keeping it under the pillow or in the banks earning a small interest.
 


Stock market volatility is scorned upon. So were syndicates ramming the market up and down. Stock market was not meant to be traded in that way, in a frenzy. Investors are there for the long term. Syndicates were seen as robbers and criminals and were watched under the microscope for any wrong doings. In double quick time they were got rid off, or many were gotten rid off for creating too much volatility in the market.
 

And their absence left a void to be filled by hedge funds and other bigger fund managers to trade the market in greater ferocity. The market mechanism was redesigned to allow the big boys to trade in greater volumes, to scalp the market, through mini bid size, for intraday trades, for fast trades by the minutes and by the seconds. High volatility is now welcomed because the snake oil sellers and conmen said it is good for the market. High turnovers, small bids, churning big volumes are good. Scrip lending facilities were created for the big boys to trade even more madly. What happens to the old wisdom of long term investment?
 

The health of the stock market today is as sick as a dying patient in the ICU. But no one wants to acknowledge this sad state of affair. Everyone is pretending that it is very healthy. Just encourage more retail investors to come in and trade. Create more products, more derivatives, cut the commissions to make it cheaper. Where got white elephant in the room. The stock market is so healthy!
 

The volumes are definitely much higher, always in the billions. There was a time when hitting a billion shares in a day was a rare phenomenon. Now hitting 3b, 5b is no problem. Anything less than 3b shares daily is bad, too small. And funny thing, where are the investors. No need investors. Just let the computers to do the trading and generate clearing fees for the exchange.
 

The brokerage are encouraged to under cut one another with lower and lower commissions to force the competitors out of business. In the meantime, in their childlike innocence, they are wiping themselves out of the business too when the commission is so low and unable to sustain the operation and pay for the overheads. And they are still scheming to reduce the commissions to even the bare minimum. Are they nuts?
 

But computer trading is not fast enough. The volumes are too small. The next big thing is to bring in High Frequency Trading where a trade can be executed in micro seconds without anyone knowing that millions of trade were done with the blink of an eye. And this is good.
 

What happens to long term investment? Long term investment is no longer about buy and hold for ten or twenty years. Long term is now measured by the seconds. Anything more than a second could be long term.
 

So what is going to happen to the stock market? If it survives in the long term, ie, more than 6 months, with HFT, it would have serve its purpose. Can anyone expect the market to be around in 3 years, 5 years or 10 years? Yes it will still be around, but no more retail investors.

8 comments:

Anonymous said...

It is goooooooooooooood. What an exciting and wonderful world.....

Anonymous said...

Long term investment is to buy blue chips lah. Or those exchange traded funds, like STI ETF.

Very safe one and of course returns are also better than FD.

But you must not be too old lah. Or else you may not be able to live long enough to see or enjoy the returns.

If too old, better go Geylang for mei meis and enjoy the returns while you still can. But you need have $$ first in order to exchange your $$ for something else (not stock of course) in return lah.

Anonymous said...

That's why Sinkieland needs foreign talents to give different kinds of returns to different types of Sinkies. Not all Sinkies are the same, remember.

Anonymous said...

Actually, all those fantastic figures of billions only means the value of money has fallen so much and billions and trillions are just electronically generated, the stock market just gives the super-rich the tools to get richer while the middle-calss and poor soon find their life savings reduced to dust. In American and everywhere else, the middle class has been wiped out in this way.

Nowadays, I even avoid unit trusts and of course investment-linked savings funds sold by banks that are tied to stocks. And not to mention investment-linked insurance policies dependent on the performance of stocks. After the fund manager's had their cut of the returns, what remains is just miserable bones and feathers for the investors.

Let's just say, it is a once bitten twice shy bitter lesson for me.

Ⓜatilah $ingapura⚠️ said...

There is no more "middle ground" in stocks -- the space once occupied by mom-and-pop investors trying to get a decent return on their hard-one and patiently-saved capital.

Nowadays if you are in the market, you either know what you are doing, or you are the sucker who thinks they know what they are doing.

What is happening to the stock market is exactly what should happen in a capitalist system: the corrupt, non-performing structures start to crumble and die when they no longer function properly, or have strayed so far from their original function.

So now we have HFT, binary trend-type trading (also has huge impact on prices), dark pools, hedge funds with enormous amount of leverage -- 30 to1 or more, insider trading, pump and dump scams, balance sheet gymnastics (aka "creative" accounting)...ah fuck it lah. The financial sector is one sick puppy. Anyone who still wants to play is welcome to what they get, be it enormous success, or financial ruin.

Abel said...

I love your new blog theme! It's a very nice. And lot a easier to read when your old new, Actually. Well done my friend well done.

Chua Chin Leng aka redbean said...

You are welcome, Abel.

Anonymous said...

The Stock Market is a PGD- Professional Gambling Den and the players are Devils and Satans in human form.

And human, having succumbed to greed, are the ultimate victims. It's all about Predator And Prey, quite synonymous to the acronym of a greedy party which only cares about growing GDP at all cost.