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The rise of electronic trading.
Boom and bubble.
Volatility and the law of averages.
Case study: Priceline.com
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| The Rise Of Electronic Trading |
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The rise of electronic trading has meant that an ever widening group of people are investing in the stock market. In a lot of ways this helped fuel the largest bull market in history but has also had a hand in the record breaking sell-off that followed.
The bull market began as we emerged from the recession of the late 80's/early 90's and economic growth began to accelerate. Investors were buying into the markets at an unprecedented rate sending stocks skyward.
Prices rose so steadily for such a long time that a rise in prices was nearly guaranteed. Investor attention shifted from assets, earnings, and dividends to concepts and capital gains.
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| Boom And Bubble |
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The booming stock market also provided companies with an easy source of capital. Dot-coms with no hope of ever making a profit were rushed to the market to satisfy the speculative desire for IPOs. The newly public companies, in turn, used their proceeds to purchase software, hardware, and advertising, thus helping fuel the growth of other tech and Net companies.
The "boom" was fueled by a pyramid scheme mentality that had investors selling stock to each other at ever increasing prices. Like a pyramid scheme, the last to join were left holding the proverbial "bag" as profit's began to slow and the public realized that the companies they owned were vastly over-valued.
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| Volatility And The Law Of Averages |
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This type of over-reaction has become common place. At the start of 2001, Alan Greenspan cut interest rates by a half percentage. The NASDAQ which had been down 2% on the day soared to close with a 14% gain.
Very little, in fact, had changed concerning the economy. The next two trading days saw an almost complete erosion of that gain as investors sold off and the NASDAQ netted little gain over the week from the interest rate cut.
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| Case Study: Priceline.com |
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Case Study (PCLN) (Note: prices adjusted to reflect splits + dividends)
Priceline.com perfectly reflects the boom and bust over-reaction of the tech sector as seen below:
Closed at $80.50 on April 1, 1999.
Closed at $139.25 on May 1, 1999.
Closed at $2.62 on February 16, 2001.
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