Re:Average stock ownership: 22 seconds
by nostrademons on Sunday January 09, 2011 @03:37AM
(#2085163)
Keep in mind that this could easily be a statistical quirk. Firms that make very frequent transactions will tend to make a lot of them; as a result, they deal in insane volume and will make up the majority of the sample size. The statement in the headline is simply saying "Stocks that get traded often make up the bulk of stocks that are traded," which most people would say "Duh" to.
To see how this plays out, imagine a hypothetical financial world that looks like this:
Firm A has $100M under management and makes a transaction every 10 seconds (total: 3 million trades). They make a return of 10%, $10M. Each trade is for 10,000 shares (average 0.03 cents/trade profit).
Firm B has $1B under management and makes a transaction every 3 months (total: 4 trades). They make a return of 10% ($100M). Each trade is for 10 million shares ($2.50/share profit).
The remaining 100 firms have a total of $100M under management and make one transaction per firm per year. They make a return of 10% ($100,000 each). Each trade is for 1000 shares.
(Ignore how everyone makes a profit in this supposedly closed financial system...we can just chalk it up to the Fed injecting money into the economy.)
If you average the holding time of each stock by transaction, you have (3 million trades at 10 seconds + 4 trades at 7.5 million seconds + 1,000 trades at 30 million seconds) / 3,010,004 trades = 1019 seconds. That's an average holding time of just under 20 minutes.
If you average the holding time of each stock by volume, you have (30B shares at 10 seconds + 40M shares at 7.5M seconds + 100,000 shares at 30M seconds) / 30,040,100,000 shares = 9,976 seconds, or an average holding time of about 3 hours.
If you average the holding time by firm, you have 1 firm at 10 seconds, 1 firm at 7.5M seconds, and 100 firms at 30M seconds, for an average holding time of just under 1 year.
If you average the holding time by firm, weighted by capitalization, you have ($100M * 10 seconds + $1B * 7.5M seconds + $100M * 30M seconds) / $1.2B = 8.75M = about 4 months.
Note how different the results are depending upon how you perform the average. The article sounds like it's averaging by transaction (i.e. taking the total number of trades and dividing it by the time period they're traded in), which is method 1. I'd argue that a better metric is method 4, averaging by firm weighted by capitalization, which indicates how roughly how long firms with lots of money at their disposal are choosing to hold stocks. In a world like the hypothetical one above, where you have a few high-frequency trading firms, a few giant fundamental-investing firms, and a bunch of retail investors, the results for that are wildly different.
To see how this plays out, imagine a hypothetical financial world that looks like this:
Firm A has $100M under management and makes a transaction every 10 seconds (total: 3 million trades). They make a return of 10%, $10M. Each trade is for 10,000 shares (average 0.03 cents/trade profit).
Firm B has $1B under management and makes a transaction every 3 months (total: 4 trades). They make a return of 10% ($100M). Each trade is for 10 million shares ($2.50/share profit).
The remaining 100 firms have a total of $100M under management and make one transaction per firm per year. They make a return of 10% ($100,000 each). Each trade is for 1000 shares.
(Ignore how everyone makes a profit in this supposedly closed financial system...we can just chalk it up to the Fed injecting money into the economy.)
If you average the holding time of each stock by transaction, you have (3 million trades at 10 seconds + 4 trades at 7.5 million seconds + 1,000 trades at 30 million seconds) / 3,010,004 trades = 1019 seconds. That's an average holding time of just under 20 minutes.
If you average the holding time of each stock by volume, you have (30B shares at 10 seconds + 40M shares at 7.5M seconds + 100,000 shares at 30M seconds) / 30,040,100,000 shares = 9,976 seconds, or an average holding time of about 3 hours.
If you average the holding time by firm, you have 1 firm at 10 seconds, 1 firm at 7.5M seconds, and 100 firms at 30M seconds, for an average holding time of just under 1 year.
If you average the holding time by firm, weighted by capitalization, you have ($100M * 10 seconds + $1B * 7.5M seconds + $100M * 30M seconds) / $1.2B = 8.75M = about 4 months.
Note how different the results are depending upon how you perform the average. The article sounds like it's averaging by transaction (i.e. taking the total number of trades and dividing it by the time period they're traded in), which is method 1. I'd argue that a better metric is method 4, averaging by firm weighted by capitalization, which indicates how roughly how long firms with lots of money at their disposal are choosing to hold stocks. In a world like the hypothetical one above, where you have a few high-frequency trading firms, a few giant fundamental-investing firms, and a bunch of retail investors, the results for that are wildly different.