From a web site reader:
Web site reader wrote:> If there are computer programs all buying millions of shares in
> microseconds, who is selling all these shares. There has to be a
> buyer for every seller. The total amount of stock is constant at
> any moment. If we had insight into both sides of the transaction,
> we would understand better what is happening here. I thought all
> transactions had to go through exchanges and specialists.
The behavior we're talking about is ordinary human behavior,
encapsulated in computer software. Even in an ordinary bubble, like
the Tulipomania bubble, there has to be a buyer for every seller.
This relates to the "greater fool" concept. You have to be a fool to
purchase assets during a bubble, but you can buy the assets expecting
to sell them to someone else, a greater fool, at an even higher
When the stock market is operating a low volume, then lots of tricks
are available to insiders.
Let's suppose I have a million shares of stock A, selling at $1.00
per share, and you have a million shares of stock B, also at $1.00
per share. Then we each have $1 million in stock.
I sell you one share of A for $2.00, and you sell me one
share of B for $2.00. Then all of a sudden, we now each of $2
million in stock. Isn't that incredible?
Once you understand that example, then you can see how all kinds of
variations can be played. I can buy a large position in one stock,
knowing that there are plenty of insiders who will buy some of it at
a slightly higher price, thus boosting the value of my entire
position, and increasing the size of the stock market bubble.
If there are virtually no fundamental traders in the market, and the
market is dominated by programmed traders all following roughly the
same kinds of buy/sell algorithms, then essentially you have
programmed traders creating a stock market bubble.
When computers create a stock market bubble, they're doing it in the
same way that humans would create a bubble, by bidding up the prices
of assets with no relation to fundamentals. The only difference is
that computers make decisions in milliseconds rather than minutes or
The New York Stock Exchange provides for "circuit breakers" that
specify that the market will be shut down if the DJIA falls by 10% or
20% or 30%, depending on the time of day.http://www.nyse.com/press/circuit_breakers.html
These circuit breakers were set up following the crash of 1987, at a
time when there was little or no programmed trading.
But today, the stock market bubble is being created by computers, and
a crash would be led by computers, all making decisions within
milliseconds. There would be no time to put the circuit breakers