Mutual fund and etf investors would have only been impacted by this event if they tried to liquidate at the precise time today that the market had this aberration. That is a vanishingly small % of people. For every other average investor they wouldn't have even noticed this by looking at their portfolio. They shouldn't be paying attention to daily swings in the dow anyway, more or less minute by minute ones.
I'm not sure what "scenario" you are talking about but the linked wsj article mentions that people reacted to a public tweet and just as quickly corrected itself after public statements from the white house. No insider information has been proven to be part of that.
The rampant and irresponsible speculation about this being some big short sell plot on this forum doesn't mean that the market behaved incorrectly. In fact, in reality it behaved exactly correctly. As soon as the hoax was uncovered the dow returned to it's correct level. Showing stability.
> The rampant and irresponsible speculation about this being some big short sell plot ...
No one said that. I said it could be used that way, not that is was.
> doesn't mean that the market behaved incorrectly.
Any time someone exploits knowledge that isn't public, it's an exploitation of a market weakness. If someone takes a position in a stock with the intent of bad-mouthing its competitors or releasing false information, he's exploiting a market weakness.
Some exploitations of private knowledge are merely bad behavior, and some, like insider trading, are illegal. All of them represent weaknesses in the market because all investors don't have the same chance to benefit.
> In fact, in reality it behaved exactly correctly. As soon as the hoax was uncovered the dow returned to it's correct level.
By your reasoning, pump & dump proves that the efficient market hypothesis is at work in the market. I don't think so. It only proves that some investors can game other investors.
Taken to its extreme, if someone was able to game the market consistently like this, day in and day out, businesses would recognize that they were being cheated and would refuse to raise capital using equities. This is why the SEC is so aggressive about locating and punishing examples of this class of behavior.
> Showing stability.
By that reasoning, if we have the same number of bank robberies on Wednesday as on Monday, we've proven that things are stable.
But where was the non-public information? Where was the gaming? Without proof of those things all speculation about insider information is moot. Pump-and-dump's are specific types of gaming the system. There is no proof this was that.
The only thing we know is that a news source incorrectly reported bad news. The market responded to that bad news in the way we would expect and then when it was obvious that it was a hoax corrected itself. That is a stable system.
It would have been proof of an instable system if either A) the market moved for some incomprehensible way or B) did not correct for obviously bad behavior.
The market took all public information into account and corrected itself quickly. Precisely as we would expect in an efficient market.
The fact that the Tweet's content was false was non-public information for a short time, just long enough to see the market begin a plunge. Obviously whoever posted the false Tweet knew it was false, and they could have exploited that fact (not to say anyone actually did this), while other people were reacting to it as though it were true.
> Where was the gaming?
See above, and use your head. A pump and dump always pivots on the fact that the perpetrator knows what he's saying is false.
> Without proof of those things all speculation about insider information is moot.
Feel free to change the subject. We have already established that this is a hypothetical discussion.
> It would have been proof of an instable system if either A) the market moved for some incomprehensible way or B) did not correct for obviously bad behavior.
What does stability have to do with it? The topic is exploitation of predictable market moves, not unpredictable ones. Obviously a hacker could (in principle) anticipate, and act on, a coming market drop on news of an attack on the White House.
> Precisely as we would expect in an efficient market.
According your thesis, insider trading is impossible because the market will magically adjust to differences in information. If this were true, the SEC wouldn't care about insider trading. The fact that the SEC does care, demonstrates that your position is wrong, and that the market can be gamed.
A market cannot be efficient unless everyone has access to the same information. This is how the efficient market hypothesis is defined. And again, the SEC does what it can to assure that people can't exploit non-public information. The reason? It undermines confidence in the market's fairness and would ultimately cause businesses to avoid equities as a funding source.
That is far and away the most pedantic form of the efficient market hypothesis I've ever heard. No one in academia or the industry actually believes that everyone always has access to the exact same information at the exact same time.
A hedge fund manager who has decided to unload a huge position but has not acted on it yet would cause your definition of the hypothesis to no longer hold. This was never the intent and if it were it could only exist in some perverted Platonic cave of a market.
In the real world, this showed a very efficient market. 2 pieces of public information were consumed nearly as fast as they could be produced and the correct prices in the market were reflected. This is what the real application of an efficient market would look like.
As far as what does stability have to do with it, your central premise was that the modern equities market was not stable and was not to the benefit of an "average investor". None of this was proven by today's event and was in fact largely disproven. Stability was not jeopardized and the average investor was not impacted by what could have been a malicious attempt to game the system or could have been a juvenile prank, either way it largely didn't matter.
> That is far and away the most pedantic form of the efficient market hypothesis I've ever heard. No one in academia or the industry actually believes that everyone always has access to the exact same information at the exact same time.
Are you trolling? The efficient market hypothesis is a hypothesis, and it's based on the premise that everyone has the same information. Which word didn't you understand?
No one knows whether the EMH is either valid or that it in any way underlies the behavior of the real market. It's ... wait for it ... a hypothesis.
Quote: "In finance, the efficient-market hypothesis (EMH) asserts that financial markets are "informationally efficient". In consequence of this, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information available at the time the investment is made."
After reading the above, has it escaped your attention that the EMH, as defined, assumes that everyone has the same information? Common knowledge is a working hypothesis, just like the EMH itself.
> ... your central premise was that the modern equities market was not stable and was not to the benefit of an "average investor".
Only when private information informs trades, and I made this perfectly clear. This is why the SEC rigorously prosecutes inside traders, because it's true -- when private information informs trades, the market isn't fair.
> None of this was proven by today's event and was in fact largely disproven.
Nonsense. The market fell based on a lie -- on private information. This proves that information must be both shared and public for the market to work as it should.
> Stability was not jeopardized ...
The market commenced to plummet based on false information. The only reason it didn't melt down entirely is because those who knew it was a lie, very quickly said so. Exactly which part of that fact do you find to be mysterious?
> 2 pieces of public information were consumed nearly as fast as they could be produced and the correct prices in the market were reflected.
Nonsense, and you are trolling. Your position is that the lie about an attack caused the market to react appropriately. But the market's move was based on false information, therefore it was not a "correct price" -- someone was gaming the system, and whether or not it was for private gain is irrelevant.
> ... and the average investor was not impacted by what could have been a malicious attempt to game the system ...
False. average investors, and all straight players, and "impacted" by insider trading -- it represents a threat to public confidence in the market. That's why the SEC prosecutes inside traders, throws them in jail.
Exactly which part of this everyday reality is causing you the most confusion?
The market can be manipulated by inside traders and people who put out misleading or false information for private gain. The SEC does all it can to address this very real threat to public confidence in the essential fairness of the market.
Circle the world you you don't understand and raise your hand.
Whether or not the US equities market generally or the Dow Jones Index stocks specifically are an efficient market is a topic best left for another forum. That said, your entire argument seems to miss a central tenant of the EMH in any of its forms. That is, that there is no LONG TERM informational advantage in the markets.
There is no mention in any of the forms of the EMH that I know of, that short term information asymmetry cannot be used for short term gain. Only that information asymmetry is unsustainable in an efficient market. If anyone had proposed otherwise they would be laughed out of the trading floor.
Further, no one claimed that market confidence isn't eroded by insider trading, only that market confidence should not, and will not be eroded by the events of today. An oddity, that corrected itself and left the vast majority of portfolios un-impacted.
Further, I posit that the fact that the market corrected itself without outside intervention, no circuit breakers, no governmental control, should be seen as a sign of stability, not as a sign of weakness. If you are a long term investor, nothing that happened today should concern you, rather you should be happy that hackers pulling pranks cannot impact your portfolio for more than minutes.
I'm not sure what "scenario" you are talking about but the linked wsj article mentions that people reacted to a public tweet and just as quickly corrected itself after public statements from the white house. No insider information has been proven to be part of that.
The rampant and irresponsible speculation about this being some big short sell plot on this forum doesn't mean that the market behaved incorrectly. In fact, in reality it behaved exactly correctly. As soon as the hoax was uncovered the dow returned to it's correct level. Showing stability.