66 ATaleofTwoMarkets
needed to fund ordinary needs such as home repair and ordinary
desires such as recreation.
As to either form of using the stoc kmar ket, however, the net
effect on market efficiency is the same. Trading decisions are based
on needs (or desires) rather than on the fundamental values of the
stoc kbeing sold. That has the effect, again, of separating the re-
sulting prices from the actual values.
As more Americans use the stoc kmar ket for these purposes—
as traders rather than as investors—EMT explains less market activ-
ity. And asThe New York Timessaid when day trader mania took
hold, America has gone from a nation of savers, to a nation of in-
vestors, to a nation of traders.^26
ECNs and discount on-line brokers facilitate trading, rebalanc-
ing, and savings via stocks. Although this positively reduces the costs
of incremental trading, it has an offsetting negative effect of en-
couraging more trades. In the aggregate market, negative informa-
tion volatility and a wilder Mr. Market ensue.
It is like Reaganomics for brokers, as people end up spending
more in commissions under this lower pricing per trade because they
trade more often. Charles Schwab, to give a representative example
of this industry, reduced its average revenue per trade from $64.27
in 1997 to $45.55 two years later while increasing daily trading vol-
ume from 106,000 to 208,000 and growing.^27 Schwab’s revenues
soared; you know who paid.
Day trading funds on the horizon will make all these matters
worse. Marrying low-cost trading, screen-based clearing, and the in-
satiable day trader appetite, a former commissioner of the SEC
launched a company in mid-2000 called Folio(fn) to cater to the
rebalancing and day trading set. It offers a fixed annual fee that is
not only much lower than typical mutual fund fees but also lower
than the average cost per trade Schwab and others charge. It uses
a proprietary trading system to match customer trading orders in
house, going to market twice a day with compiled customer orders
to clear any imbalance. Touted as a way to help investors, this day
trading fund will increase trader volatility.^28
PROGNOSIS
The main effect of amplified volatility—from low-quality informa-
tion, market fragmentation, and noise traders—is less efficient pric-