By David Trainer via Iris.xyz
Noise traders – individuals that distort the market by trading on incomplete or inaccurate information – have been discussed by academics and investors alike for decades. No one could ever deny the existence of noise traders, but proponents of the efficient market hypothesis (EMH) have long contended that these traders have little-to-no impact on the overall market.
The past twenty years – which includes the tech bubble, housing bubble, and dozens of boom and bust “story stocks” – make it clear that noise traders have much more influence than EMH doctrinaires admit. That influence is only growing, as the rise of self-directed traders and the relentless noise of the financial press mean the noise to signal ratio is worse than ever. Wild swings in stocks such as Tilray ((TLRY [NGS] – $128.96) show just how inefficient markets can be.
The Rise of the Noise Traders
The market has more self-directed investors than ever before. New self-directed trading platforms keep cropping up, and existing platforms are gaining more and more users. Figure 1 shows that the number of accounts at TD-Ameritrade grew by 60% from 2007 to 2017.
Figure 1: Number of TD Ameritrade Accounts: 2007-2017
Add in Robinhood, which doubled its number of accounts to 4 million in the past year, and a wide variety of other trading platforms, and we’ve reached a point where a quarter of all U.S. adults with internet access are self-directed investors. That’s ~50 million amateur traders out there, many of whom weren’t invested during the last market crash.
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