Looking For The “Real” Investor

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The head of The New York Stock Exchange is questioning the viability of the tremendous March market rally. He contends “real” investors were not in the thick of the trading. He has the benefit of access to statistics which almost no on else has, so his opinion should carry significant weight.

“In rare comments about market movements, Duncan Niederauer said in an interview with the Financial Times that the rally was driven by short-term traders trying to take advantage of high volatility and not by large institutional or other long-term investors,” the paper noted.

Mr, Niederauer artful use of words does not disguise the fact that money is money. That would seem to be an obvious statement, but it is not insofar as the trading of stocks goes.

A share of Citigroup moves in the market based on who has bought it or sold it, regardless of the source of the capital. Short-term traders become, in essence, long-term traders if they stay in the market for extended periods. If they can make money by betting that the market will rise or fall by going short or long, their participation may be perpetual. Day-traders may trade for hundreds of consecutive days. The fact that they are “unreal” trades does not deprive them of their ability to move stocks or indexes.

One of the most important facts about short-term trading is that it is often done by the “real” investors, the institutions. Huge pools of capital sit in the largest hedge funds and on the proprietary trading desks of the largest banks both inside and outside the US. All of these trade US equities and most are clever enough to make money at it most of the time. The thought that they will take long-term positions is, in most cases, preposterous. That does not make them any less real as participants in the market.

The really “real” investors according to Mr, Niederauer, are those that put large amounts of institutional money up and probably hold stocks longer term. There is no reason to assume that they have any special knowledge of the markets or are more ingenious in their trading habits. What they are not is “churners.” They do not move in an out of positions at a rapid pace. That fact will not stop the market from falling if there is bad economic news. The “real” investors will take their punishment with everyone else.

The fatuous thinking that investors act in discrete groups because they have distinctive and different goals has always been undermined by one fact. Investors are in the market to make money and not lose it, and they will act accordingly.

Douglas A. McIntyre