AmplifiedVolatility 59but that negative information volatility will result. That bad news for
market efficiency is not entirely bad news for you as an investor,
however, so long as you steer clear of the pump-and-dump set and
take advantage of the widening spread between price and value that
results from their dirty work.
TRANSACTION VOLATILITY
The second source of stoc kprice volatility is transaction-related.^18
This arises from the way prices are formed by market trading. It is
not possible for any party acting alone to set the price of a stock.
Share pricing in stoc kmar kets arises solely as a result of traders’
orders meeting in the market. How they meet in the market to de-
termine prices is important to know but often overlooked.
Trades on traditional markets such as the New York Stock
Exchange (NYSE) begin with a customer who instructs a broker to
effect a trade, say, to buy 100 shares of Dell at $50. The broker takes
that order to the trading floor, where a crowd of traders are at work.
If there were another broker who had gotten a customer’s order to
sell 100 shares of Dell at $50, the two could just swap shares for
their customers. No price change would result, and so there would
be no transaction volatility. That perfect matching of buy and sell
orders seldom happens on traditional exchanges (or on the Nasdaq,
where the chief difference is only that matching is done more by
computer routing of orders than through the physical presence of
people on the floor).
Instead, buyers and sellers place orders with their brokers at
different times, want to trade different amounts of shares, and want
to buy or sell at different prices. In these more typical cases, the
customers have to wait until someone else arrives looking for a trade
on the same terms or have someone else in the market make the
trade. That someone else is there, and she is called a market maker
(on the NYSE) or specialist (on the Nasdaq) in that stock.
When a broker can’t find another broker looking for a precise
swap with his customer’s order, these middlemen (market makers
and specialists) do the trade so that the broker’s customers don’t
have to wait until a counterpart comes along. The middlemen do
the waiting for them, making markets in stocks by buying and selling
shares when buyers and sellers arrive.
Middlemen make money for providing this service by buying