Having literally spent years looking at every new piece of garbage that has come out of academia, or out of the NYSE (who fired their chief economist after decimalization), I will not even look at these studies. I would rather read the ingredients on a cereal box.


It is a guarantee that they are wrong, that they have missed some critical detail. Every paper is wrong. They're all wrong. Can I say that again? The people who write these papers are not even good economists, and many of them have never actually placed a market or a limit order. They begin out of college with the assumption "the stock market is efficient and can't be beat" so why would they even risk a dime?


There is, actually, a predominant common error they all share, but I am trying to remember what it is, rather than having to re-read them to remind myself. Don't be surprised if it is so simple that they limit their studies to orders which get filled. I'm serious!


The truth is, I doubt they can actually even do a "study." Are they really going to get some guy at Fidelity Magellan, or anywhere on down, to roll some dice before he decides whether to use a market or a limit, and where to place the limit relative to the last tick, or when to fire the market? I don't even think they could raise the money to do this experiment with just 1,000-lots, which would be irrelevant to their customers anyway. And how would they construct a control group?


That is not to completely rule out the possibility that, in some market microstructures, with some size orders, limit orders will be used more often in a profitable strategy which chooses which to use based on various factors in a given situation. It is also certain that the stock market will either go up or down today, and that the planet is getting either warmer or cooler. But even with 50% odds, academics, and the global warming/cooling crowd, seem to find a way to be wrong.


leroy


P.S. Okay, I caved and glanced at the unfamiliar Austin/Olin study, and it is gibberish. They're not even talking about the stock market, they're talking about some abstract situation in some abtstract model of the stock market. The first thing they need to do is prove to me how their notion of the stock market has any relavance to the actual stock market, as they don't suggest the appearance of having done much trading.


Okay, I waded through some more and found this quotation (I couldn't help myself):


"As a result, when a specialist changes her quotes it might be hard for other market participants to infer whether the quotes changed due to the arrival of new information or to inventory control considerations on her own behalf."


Oh, look! I hadn't even noticed how arrogant these pricks are to specify the specialist is a girl by using "her" rather than using "his" which does not suggest the specialist was either a man or woman any more than a flock of geese is presumed not to contain any ganders. Oh, but they're just better than the rest of us. And, moreover, not only when we used "he" were we implying the specialist was a man, we were also wrong. Thank Heaven we have these asses here to correct us.


But the real problem with this quotation is their original assumption of a symmetric fair value, or a "fair" price, which would be uniform across all participants if they had identical information. In fact, asymmetric utility, and asymmetric information costs, is the whole reason stocks, or anything else, exist. What they're saying, I think, is did the specialist raise his bid because earnings prospects for the company had increased, or because he found himself short an uncomfortable amount, or because there were buyers?


The reason the specialist raised his bid was to reflect the presence of nearby buyers, whether they included him or somebody else, and regardless of why they were buying. People don't buy because a stock is below fair value, rather fair value can only be arrived at after seeing who wants to buy - which can never be discovered perfectly.


But this type of thinking is so mushy-headed I do not even wish to continue. The entire academic model of the stock market is, understandably, wrong. I am apparently the world's greatest financial economist, or at least that is what I am beginning to think. So if you want to know anything, and I can't give you an answer, you're better off assuming the answer is unknown.