I think you go overboard here. I have no doubt that lots of day traders do some kind of hedging and offset themselves. But this glorified claim that day traders are just smoothing out "market irrationalities" strikes me as mostly being nonsense. For one thing, you can't make big money if you hedge too much. Risk brings return and it is by plunging that you get the big returns. That was what we saw with things like the Barings disaster.
As for LCTM, you are partly right that they were so big that they were hedging against themselves to some extent. But we have seen this before. Hedgers generally need a "normal market" to hedge against. If the market as a whole goes wacko all the hedge strategies go blooey, as happened in October, 1987. Everybody ran for the exits at the same time.
This is essentially what happened last August. I don't see it having anything to do with Greenspan/Rubin/Summers. Are you saying that they could have bailed out Russia when it defaulted thereby making the bets on Danish mortgage rates OK? I don't think so. There was an unforeseen leptokurtotic shock that simply went beyond the Gaussian normal probability distributions these bozos were plugging into their derivatives strategies and the whole thing blew apart.
Happened then and can happen again and no amount of allegedly neutral strategies by day traders will save their behinds when it does. Barkley Rosser -----Original Message----- From: Henry C.K. Liu <hliu at mindspring.com> To: lbo-talk at lists.panix.com <lbo-talk at lists.panix.com> Date: Wednesday, February 24, 1999 4:43 PM Subject: Re: Fwd: Warning signs of the coming financial armageddon, #569
>Doug:
>
>You are right that there are no theories to adequately describe the current
>market complexities. Yet you then fall back on a zero sum game theory.
When
>future traders log a trading loss, that does not mean they lost money
unless
>they did not executive a counter hedge strategy and that kind of animals
simply
>do exist nowadays.
>The number of naked speculators are very small. Day traders do not
speculate
>blindly. They aim at neutralizing market inefficiencies and perform a
useful
>market function. They do not bet against each other but against
>irrationalities in the market.
>Their main function is to neutralize market manipulation, purposeful or
>mechanical. The trouble with LTCM was that its got so big that it was
>neutralizing its own strategy and even then it would not have run into
trouble
>if Greespan/Rubin/Summers had been policy consistent . G/R/S actually
believed
>their own propaganda of free market when every market participant knew it
was
>just ideological propaganda.
>That was the paradigm shift, from a G/R/S controlled market to a free
market
>and wiped out LTCM.
>
>The NY markets surely will crash before too long, but day traders will
continue
>because most of the strategies are market neutral.
>Also, the global markets HAVE CRASHED all over the world except in the US
and
>Europe. After 20 months, there is no more crisis, because the pains have
been
>normalized. Even if the DJIA should fall to 4000 in March or October, we
will
>only go back to 1987. Remember IBM at 50? The world did not end and some
>people got rich picking up cheap assets.
>
>Henry
>
>
>Doug Henwood wrote:
>
>> Enrique Diaz-Alvarez wrote:
>>
>> >I think one possible explanation is that a small percentage of day
>> >traders, through sophiticated models, intuition, or whatever, have
>> >figured out a way to take money from a large majority that start up,
>> >lose money, and quit. Not much different from all those "get rich quick
>> >dealing in real state" infomercials, although in a much larger scale.
>> >But I admit I haven't seen any hard data about daytraders and their
>> >profit/losses, beyond self-reported anecdotal evidence. Do you have any?
>>
>> Too soon to know for sure. But, given fairly well-established facts like
1)
>> 80-90% of amateur futures traders lose money, and 2) the more you trade,
>> the worse you do (true of both professional and amateur speculators), I
bet
>> they're not doing too well. I think you're right that there may be a gang
>> of survivors that make their money from all the novices, but whether
>> survivorship is the result of luck or skill has yet to be established. My
>> bet is that 90% are there because of luck and 10% because of some kind of
>> skill, but we won't know for some time, until the professors of finance
get
>> the time to do some rigorous studies.
>>
>> Doug
>
>