Context: Beyond your wildest dream
Recently, Mohamed El-Erian alluded to "illusion of liquidity" during a discussion about current economic events and the related climate, referring to market liquidity's promise (unfounded?) of allowing someone to dump an asset without (too much of a) loss. His use causes us to recall a term coined during the last downturn by Marilyn vos Savant which has been utilized in our posts, namely "Cheshire multiple".
Marilyn may not have known the significance of her example or was being facetious, however she was more right than not. Hence, the concepts related to this blog will use the tag provided by Marilyn.
We may need to push Marilyn's idea down the stack and raise another: joint hypothesis problem. This notion is prominently referenced on the Efficient-market hypothesis page. The jhp page has problems so we will be digging deeper. Essentially, one takes emh as given; then, jhp allows one to argue that no disproving conclusion is acceptable (best of all worlds - who said that economics was dismal? - looks awful creative to me).
On a brief look, though, my thought is: why do these smart, and rich, folks keep letting me down? Firstly, they try to befuddle things so as to keep the game going in their favor, by arguing for the CM and dark pools and other things that appear to be shenanigans. Then, they have all sorts of data and graphs to show (behavioral science, it's called) as if these were acceptable proofs. And, but not lastly, the whole industry keeps spinning to the max (without considering the "true" costs) in a manner of deceptive diversion of the short attention span of the masses.
One solution? All entities would be tracked during their lives. Yes, as in, a stock piece (to be treated as if it were a real item) would be handled (why else have all of this computational power?). So, then, the arbitrage efforts, and other gamings using advanced computation, would morph to accounting tasks and related types of things.
Gains? Yes, rather than the current mess (early outers take the cake - the rest are guaranteed losers), one would know at every instance the whole trace of who owned and sold any of the pieces throughout their little history. Think that this could not be done and is not necessary? Well, then, we'll continue with the messes (and mature folks having to clean up the diapers of the players).
As joint hypothesis says, stuff it.
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