Re: Market efficiency: good or bad?
Sat, 3 Jul 1999 13:11 +0000

   >>> >did I mention that letting people just bet, outright, on

>>> > which way a stock will go, without actually having to buy anything and
>>> > with no brokerage commission, would probably go a long way towards
>>> > stabilizing the stock market?

Just by the way, how do you figure?

If the bet is a simple "up" vs "down," you either double your money or lose it all. Relative to the stock itself, that's a lot of risk. Even if you bet wrong on a stock, you can usually get out at a loss of less than 100%.

This is just a very simple form of an option, which you can buy already for most big stocks. (You can do this bet exactly with a combination of options.)

As well, consider the casino that takes bets like this. In order to hedge itself against catastrophic loss it has to make offsetting bets in the underlying market. Basically, it has to take the exact opposite bet in the market, unless it can find someone else to make the opposite bet. Now granted, a lot of the time there will be a seller for every buyer, but not all of the time. That's why prices go up and down. And the difference on its books will have to be hedged by an investment opposite to their net position in the market.

So actually, having this ability would probably increase the volatility of the market rather than decrease it.