Talk about trading for dummies!
A model that assumes stock market traders have zero intelligence has been found to mimic the behaviour of the London Stock Exchange very closely.
However, the surprising result does not mean traders are actually just buying and selling at random, say researchers. Instead, it suggests that the movement of markets depend less on the strategic behaviour of traders and more on the structure and constraints of the trading system itself.
The research, led by J Doyne Farmer and his colleagues at the Santa Fe Institute, New Mexico, US, say the finding could be used to identify ways to lower volatility in the stock markets and reduce transaction costs, both of which would benefit small investors and perhaps bigger investors too.
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The model also showed that increasing the number of market orders increased price volatility because there are then fewer limit orders to match up with each other.
The observation could be useful in the real financial markets. “If it is considered socially desirable to lower volatility, this can be done by giving incentives for people who place limit orders, and charging the people who place market orders,” Farmer says.
That’s an interesting study but I have a tough time imagining the markets penalizing market orders. Don’t the specialists and market makers thrive off of volatility? And such a change would seriously mess up my system because I almost never use limit orders. I want my orders executed quickly instead of haggling for an exact price.
