The Effect Of The Internet On Equity Markets

[Methinkshe]

I've been wondering...........

Has the ability to trade shares so easily, i.e. at the click of a mouse, together with access to instant information,

a) encouraged short-term speculation - i.e. backing market movers (or stock indices themselves) with little regard for any underlying strength of companies - as opposed to long term investment in strong companies?

b ) if so, could this financial crisis unfold in quite a different way than those that have gone before? For instance, could swings be more violent and more pronounced in both directions?

The reason I ask is because I caught a comment on Bloomberg TV along the lines that speculators (and they used the term "speculators" and not "investors") are waiting in the wings to re-enter the market and despite all the gloomy news and lack of any fundamental strength, their re-entry could cause a significant rally.

I know there has always been an element of speculation in markets - going right back to the South Sea Bubble and Tulip-mania. But I wonder if this hasn't been exacerbated by the ease and speed with which shares can be bought and sold, and the speed with which it is possible to receive and react to news.

[Guest Daddy Bear]

I've been wondering...........

Has the ability to trade shares so easily, i.e. at the click of a mouse, together with access to instant information,

a) encouraged short-term speculation - i.e. backing market movers (or stock indices themselves) with little regard for any underlying strength of companies - as opposed to long term investment in strong companies?

b ) if so, could this financial crisis unfold in quite a different way than those that have gone before? For instance, could swings be more violent and more pronounced in both directions?

The reason I ask is because I caught a comment on Bloomberg TV along the lines that speculators (and they used the term "speculators" and not "investors") are waiting in the wings to re-enter the market and despite all the gloomy news and lack of any fundamental strength, their re-entry could cause a significant rally.

I know there has always been an element of speculation in markets - going right back to the South Sea Bubble and Tulip-mania. But I wonder if this hasn't been exacerbated by the ease and speed with which shares can be bought and sold, and the speed with which it is possible to receive and react to news.

Increases volatility

Not just in shares but also in housing.

Mania (both FEAR & GREED) is fuelled by communication

The Internet (one of many) has helped to fuel the biggest global HPI in History

Previously it also ironically fuelled the Tech boom as well as created it.

[Injin]

The interent has almost certainly killed fractional/debt based banking, our court system as we know it, destroyed the mainstream media, will flatten politics - so yes I can see how it will effect chare prices.

One of the biggest problems is the information gap between insiders and the rest - this gap is getting smaller all the time and because it is ifnormation based anc an be charged for - there is an incentive to tell peopel the truth instead of lies.

Don't forget, the most important economic news you almost certainly read on here, for free, put forward by talented amateurs.

[Uriah Heap]

My opinion is that the internet would have an enormous impact if the majority of people in the market were carefully assessing risks, opportunities and using the information they gathered to rationally guide their investment decisions.

If the majority were driven primarily by emotion and gut instincts it wouldn't make any difference how good their tools were.

On that basis, my vote is that the internet will make not the slightest difference to the way the market behaves.

[Methinkshe]

Increases volatility

Not just in shares but also in housing.

Mania (both FEAR & GREED) is fuelled by communication

The Internet (one of many) has helped to fuel the biggest global HPI in History

Previously it also ironically fuelled the Tech boom as well as created it.

Volatility is what share traders thrive on, is it not?

Therefore, would it be true to say that the net result could be to increase speculation? Which in turn will increase volatility.......?

Thus, bear market rallies could be spectacular and falls could be equally spectacular.......?

As for the denouement............I shudder to think.

[Frank Hovis]

The interent has almost certainly killed fractional/debt based banking, our court system as we know it, destroyed the mainstream media, will flatten politics - so yes I can see how it will effect chare prices.

One of the biggest problems is the information gap between insiders and the rest - this gap is getting smaller all the time and because it is ifnormation based anc an be charged for - there is an incentive to tell peopel the truth instead of lies.

Don't forget, the most important economic news you almost certainly read on here, for free, put forward by talented amateurs.

100% agree.

This site has the huge advantage of a lot of informed people giving their honest opinion.

Fionnula, Darling, Yvette Cooper, and even Gordon Brown may be economic experts. But as they're not being open and truthful for various reasosn we shall never know. People on here are honest, even if they're wrong.

[Injin]

My opinion is that the internet would have an enormous impact if the majority of people in the market were carefully assessing risks, opportunities and using the information they gathered to rationally guide their investment decisions.

If the majority were driven primarily by emotion and gut instincts it wouldn't make any difference how good their tools were.

On that basis, my vote is that the internet will make not the slightest difference to the way the market behaves.

Over time it will - because those internet commentators who do do those things will get the largest following.

Most people follow, but they are smarrt enough to follow winners and always will do so over the long haul.

[R K]

No.

[grey shark]

Fionnula, Darling, Yvette Cooper, and even Gordon Brown may be economic experts.

I wouldn't class any of the above as 'economic experts' they don't live in the real world they don't mix with real people and so can't be expected to know what's really going on ....also they didn't see it coming and now it's here they don't know what to do

[Frank Hovis]

I wouldn't class any of the above as 'economic experts' they don't live in the real world they don't mix with real people and so can't be expected to know what's really going on ....also they didn't see it coming and now it's here they don't know what to do

You miss my point GS.

Fionnula may have seen the housing bubble for what it is and be expecting 60% falls from peak. But if she said so she would be sacked as she is there to talk up house prices.

I accept that politicians don't live in the real world.

[kittingerjump]

I think it makes it different as the internet can get information around quickly although it's not necessarily decent or accurate.

You have to take the rough with the smooth, but it's easy to get caught up in opinion without real substance being there. I'd assume that if I was a serious investor in the markets that the internet would be the last place where I'd want to share my business. It's a case of there being too many bedroom football managers. HPC is guilty of this as well with many people calling black monday etc without a proper bit of evidence. The internet is a dangerous place for those that live off hunches but don't get involved in face to face business.

IMO (of course!)

[Gone baby gone]

a) encouraged short-term speculation - i.e. backing market movers (or stock indices themselves) with little regard for any underlying strength of companies - as opposed to long term investment in strong companies?

b ) if so, could this financial crisis unfold in quite a different way than those that have gone before? For instance, could swings be more violent and more pronounced in both directions?

a] Yes

b] Yes

It has also allowed people who would previously not have considered shares to start dabbling. I have one friend and a brother-in-law who have both lost >£3K (in my friend's case, it's >£10K) speculating on short-term share performance.

The banking sector collapse will have burned a lot of fingers, but like your typical gambler, they go in deeper to try and "recoup their losses".

Edited March 8, 2009 by redalert

[Methinkshe]

No.

That was a pretty bald disagreement with my proposition!

Would you care to elaborate? I'm interested as to why you think there will be no effects.

I'm pretty sure that volatility will increase or, has increased. The pendulum is now making larger swings which means extremes will be more pronounced. It should also mean the the swings should be of longer duration.

Or is a pendulum the wrong analogy...?

[interestrateripoff]

100% agree.

This site has the huge advantage of a lot of informed people giving their honest opinion.

Fionnula, Darling, Yvette Cooper, and even Gordon Brown may be economic experts. But as they're not being open and truthful for various reasosn we shall never know. People on here are honest, even if they're wrong.

The advantage of forums is that people are giving honest opinions this is in fact very good for debate. Ultimate you can come to better decisions because you have more of the facts and arguments. You can also freely express your opinion and try out new trains of thought.

All other commentators move in a herd mentality they will only say what the herd collectively thinks.

Very few have the ability to speak out and when they do the herd has the problem that's it's beliefs are so ingrained they can't think any other outcome is possible.

When Roubini announced that the entire system was screwed no one wanted to listen.

[ParticleMan]

One of the biggest problems is the information gap between insiders and the rest - this gap is getting smaller all the time and because it is ifnormation based anc an be charged for - there is an incentive to tell peopel the truth instead of lies.

As the newsdata gap narrows a gulf is opening up in historicals.

We can't see it yet but as this half-cycle bottoms and turns the recovery will be driven not by news, but by analytics.

And the common man is going to get absolutely slaughtered.

[Injin]

As the newsdata gap narrows a gulf is opening up in historicals.

We can't see it yet but as this half-cycle bottoms and turns the recovery will be driven not by news, but by analytics.

And the common man is going to get absolutely slaughtered.

He won't.

There'll be people who give the info away for free because it amuses them to do so. All the common man has to do is find someone who does good analysis and he can find that merely be looking at the same historicals.

Reputations and therefore integrity, truth and wisdom will come to the fore, because that's what works in a free market - which is what the internet really is.

[ParticleMan]

Reputations and therefore integrity, truth and wisdom will come to the fore, because that's what works in a free market - which is what the internet really is.

I'm less optimistic.

We're in for a return to Florentine banking and associated intrigue, I think.

Driven by the organisations that have vats of information (rather than raw data) and have also retained the skills to analyse it.

Hell, all the honesty in the world can't even satisfactorily resolve trivial issues - like whether what's happening is deflationary, or inflationary.

[Injin]

I'm less optimistic.

We're in for a return to Florentine banking and associated intrigue, I think.

Driven by the organisations that have vats of information (rather than raw data) and have also retained the skills to analyse it.

Hell, all the honesty in the world can't even satisfactorily resolve trivial issues - like whether what's happening is deflationary, or inflationary.

Events are going to prove one side accurate over the other.

That's something that anyone can see, it doesn't require amazing technical analysis post event. This is why telling the truth and wisdom are marketable over and above feeding people a line and making thinking errors over time.

As for insiders contiinuing to be inside, of course that's true. This is about the t'internet though.

[Methinkshe]

As the newsdata gap narrows a gulf is opening up in historicals.

We can't see it yet but as this half-cycle bottoms and turns the recovery will be driven not by news, but by analytics.

And the common man is going to get absolutely slaughtered.

Does it not depend upon what one is analysing?

For instance, if enough people are historically unaware yet still choose to act, then it is they who will move the markets (rightly or wrongly as far as historical analysis is concerned).

Therefore, what is more important in these days of instant access to knowledge and reaction to same is to know what other people are thinking, and therefore what they are likely to do, regardless of whether their analysis is correct or incorrect, historically or otherwise.

(Please view the above as a tentative proposition, not a statement of belief!)

[ParticleMan]

Events are going to prove one side accurate over the other.

Sure, but what matters is being able to calibrate opinion to measurement, and without the deep historicals your opinions will be equally uninformed (hence outcomes - in terms of predictive accuracy - become dominated by luck).

As for insiders contiinuing to be inside, of course that's true. This is about the t'internet though.

The internet is largely insignificant in this industry.

It's still getting beaten (on a regular basis) by the command model; in terms of timeliness, accuracy, and precision.

The highest quality information is still to this day sourced by (and in some cases, from) the state (think military applications and you're not too far off the mark).

The next highest quality information is that sitting in the bowels of the larger of the global investment banks (the datastreams they tap and the things they do with it are awesome to behold).

Trailing a very distinct third is broadcast - the Internet is holding its own here; but the shift to op-ed and lifestyle journalism has killed informational quality for good, unless you're talking viability for research into sentiment or social trends.

This is an industry near and dear to my heart.

[ParticleMan]

Therefore, what is more important in these days of instant access to knowledge and reaction to same is to know what other people are thinking, and therefore what they are likely to do, regardless of whether their analysis is correct or incorrect, historically or otherwise.

Absolutely, there's no finer metric for assessing the direction and composition of the shoal.

But it's worthless for testing a thesis against; the data is more akin to a million monkeys than Shakespeare.

[Injin]

Sure, but what matters is being able to calibrate opinion to measurement, and without the deep historicals your opinions will be equally uninformed (hence outcomes - in terms of predictive accuracy - become dominated by luck).

I don't think you are getting my point. the common man doesn't need to have anything except the name of someone

who can do what he wants or knows what he wants. he doesn't have to be able to do it. As the marketplace of the internet is price equal for all opinions ( time is the only investment post start up) then accuracy over the long haul means that flocking behaviour will ensue.

It's happened in fashion, in cinema, in tech products, in automotive etc etc - so why not in investing?

The internet is largely insignificant in this industry.

It's still getting beaten (on a regular basis) by the command model; in terms of timeliness, accuracy, and precision.

Of course because of the reasons you outline below.

The highest quality information is still to this day sourced by (and in some cases, from) the state (think military applications and you're not too far off the mark).

The state creates the market via the CB. Let's see how they do without one.

The next highest quality information is that sitting in the bowels of the larger of the global investment banks (the datastreams they tap and the things they do with it are awesome to behold).

Trailing a very distinct third is broadcast - the Internet is holding its own here; but the shift to op-ed and lifestyle journalism has killed informational quality for good, unless you're talking viability for research into sentiment or social trends.

This is an industry near and dear to my heart.

Without fiat money?

Forget it.

Banks of all kinds are completely doomed, thank ******. A bank will be a warehouse you stick your valuables like antiques in again - the ship of the paper reciept has sailed and it'll never come back.

[Methinkshe]

Absolutely, there's no finer metric for assessing the direction and composition of the shoal.

But it's worthless for testing a thesis against; the data is more akin to a million monkeys than Shakespeare.

I disagree; the million monkey analogy cannot be applied to herd mentality. It applies to probability, not to mass movements.

The herd moves irrationally but when it does move it can have major effects. What compels the herd to move in any direction is less important than the fact that it DOES move.

It seems to me that the internet has given herd mentality a voice - a means to spread panic (irrationality) far faster and more extensively than has ever before been possible.

Edited to add:

Take Twitter, for instance. The threat of a riot in Rio could translate to a sell order from a trader in London within seconds.

I don't do Twitter, btw, but from what I have read of it, no trader should be without an extensive Twitter network. Actually - it's frightening, the speed with which news can travel....

Edited March 8, 2009 by Methinkshe

[R K]

That was a pretty bald disagreement with my proposition!

Would you care to elaborate? I'm interested as to why you think there will be no effects.

I'm pretty sure that volatility will increase or, has increased. The pendulum is now making larger swings which means extremes will be more pronounced. It should also mean the the swings should be of longer duration.

Or is a pendulum the wrong analogy...?

I said "no" because I don't think it has.

Those charts comparing this bear market to earlier (pre-internet/pre-big bank/pre-TV etc etc) markets doesn't appear to confirm it.

The markets will be moved by the big players, not the little guy with a few Ks, or hundred Ks, or even millions. I don't see it as being any different because the internet exists, or the telephone exists or the telex exists or you're even stood on the trading floor of the NYSE. Decisions still have to be made, and the capital deployed, irrespective of the mechanism employed to do it.

So, I'm not sure it matters much whether Joe Shareholder signs onto his E-Trade account tomorrow to sell all his shares, or calls his broker or sends them a letter via pigeon post. He's still probably going to do precisely the wrong thing and get his money taken off him. The only question is whether that's at 12.17 tomorrow via the internet, or perhaps Tuesday morning when the post is opened. What's the difference?

[ParticleMan]

It seems to me that the internet has given herd mentality a voice - a means to spread panic (irrationality) far faster and more extensively than has ever before been possible.

I don't disagree with your perspective.

But in a world where this dynamic (of ignorance leading to volatility in sentiment) what will matter will be the ability of each individual to test each newly formed opinion against the most robust dataset available; this is what gives rise to the Florentine banking analogy - where the most-likely-to-be-predictive opinions are formed by those with access to the richest data sources.

If an individual can predict that herd behaviour is irrational they can stand aside from it; call it confirmation bias, but I'm already forming the opinion that I'm starting to see precisely this in effect right here on HPC (some people are adopting a far more scientific reasoning process than others and actually using the undercurrents here to test and prove a theory).

Injin - in each of those industries you mention what has actually happened is a fragmentation of the consumer and an aggregation of the producer; in each of those industries the producers actually now have more pricing power than they did when each of those industries were newly formed.

What's Google's rake of global advertising spend again?

This dynamic does not encourage the individual; it works to the advantage of the centrist collective.