A stock operator's thoughts and ideas about market principles
Stock Trader and
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J.P. Janssen's website.The purpose of the site is to discuss ideas and principles about markets. More |
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The Special Sections Relative Sizes Quotes The Domino Effect |
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Recommended Books The Edu. of a Speculator 
Practical Speculation 
The Black Swan 
Fooled by Randomness 
Market Wizards 
Reminis. of a Stock Operator 
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Recommended Websites Daily Speculations Science Daily CIA World Factbook Project Gutenberg LibriVox |
Apr/05/2009
The Clustering of Liquidity
It is interesting to observe how traders cluster to some very few stocks. A quick look at the trading at Oslo Stock Exchange shows this:
The y-axis shows the volume in dollars for each stock and the x-axis has sorted the stocks from the least to the most traded. The logarithmic graph has removed the zero-volume stocks since ln(0) is undefined.
From an individual investor′s perspective each stock should be equivalent. Theory also suggests that low liquidity should be compensated with a higher return. But this leaves a paradox: High spread and a thin order book is a greater problem for a large than for a small investor. The solution to this problem is probably that small players should trade low liquidity stocks and the large ones are better off by staying away.
How could this be modeled?
And what when a low-liquidity stock suddenly gets an increase, will it then suddenly peak in price (and maybe have a binomial distribution as it goes along a trend - either it will reach the "popular" club or fall back down) ?
Feedback highly appreciated.
More philosophizing at a similar study from 2007.
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