> >On Sat, 20 Jul 1996, Dave Steele wrote:
> >>...I don't believe that there is an
> >> accurate market unless trades are occurring.
> >Not necessarily. No trades could simply mean that the price has been
> >pegged successfully, as closely as possible to the "right" price.
> Exactly. If there is no activity in the market, the price may be 'right',
> or it may not. There is no assurance either way.
Agreed. I did say "not necessarily"...
> >As long
> >as no new information enters the market, it has no reason to fluctuate and
> >be traded.
> Sure it does. As new traders are added to the mix, they will add their
> opinion to the bid sheet. Also, as older traders re-evaluate their
> portfolio (e.g. flush with cash from the election), they can be expected to
> change their position, even if their opinion (and the state of the issue)
> is constant. As long as the overall market is dynamic, every issue should
> be expected to be affected..
Possibly. Certainly, I'd hazard, for short-term claims. I still see
problems for long-term claims (but you knew I'd say that). (My definition
of "long-term" is 10 years plus to maturity.)
The trouble is, what happens if the "right" bid/ask contains a wide
spread? I.e., what if the right bid is 20 and the right ask is 80? You get
no trades, except those made by eternal optimists... which don't help the
> >In fact, no trades actually have to occur for the price to
> >change. It's sufficient for the bid and ask to change.
> If bid and ask prices are changing, and the spread is small (also a
> desirable trait), then trades will likely be occurring. If one of those two
> traits is missing, then assumptions about an efficient market may be
Likely they will, yes. The market may be efficient without creating small
spreads, see above paragraph in my response. One further possible change
that could be made would be to make the prices finer by adding decimal
places. It's too easy for a bid/ask to hit 5/6 and then never trade,
whereas if it were 5.49/5.51 it might be trading around in that range
quite a bit.
"Oh, well, what the hell." - Yossarian