The challenges of trading on the equity market

Short-term speculation on the stock market, called “trading”, is defined as the act of buying and reselling securities of listed companies very quickly with the sole aim of making gains of small amounts but in large numbers. In this sense, it is opposed to the notion of investment which consists of acquiring securities to hold them over the medium/long term and make gains over this time horizon. Equity investors are useful to the real economy, either because they subscribe to new issues of securities and thus directly finance the companies that place them on the primary market, or because they buy back securities on the secondary market and thus indirectly contribute to the dynamism of the primary market. The question that arises is how short-term speculators – traders – are useful, and if they are, should their behavior be regulated or their activity taxed?

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In fact, it appears that short-term speculation is very useful because it improves the functioning of the stock market. But its activity can also prove destabilizing, particularly since the appearance of the robot-trader phenomenon, which justifies its being supervised. The taxation of speculative stock market transactions, although desirable, nevertheless raises the problem of its effectiveness in globalized finance.

Short-term speculation improves the functioning of the stock market

Short-term speculation on the stock market is mainly carried out by professional participants called “  traders  ”. Their job consists of buying and selling shares listed on the secondary market during the same trading day on the stock exchange and making a profit (net of transaction costs) by playing on the difference between the purchase price and the resale price. .

Given the volatile nature of the price of a stock, that is to say the fact that its price fluctuates upwards and downwards depending on the comparison of sale and purchase orders , the trader does not is never certain of being able to make a profit from its operations. He is even likely to make losses if he makes bad choices. The trader’s job is therefore very risky . In fact, his remuneration depends on his ability to correctly anticipate daily changes in the price of certain stocks and to do this on being constantly on the lookout for relevant information . He must also be able to effectively exploit these by intervening very quickly in the purchase or sale of securities and for this he must be constantly “on the market” from the opening to the closing of the session.

It is this last characteristic that makes traders “useful” to the stock markets. Through their activity, they drive the secondary market and therefore enable it to operate efficiently:

on the one hand because the multiplication of purchase and sale orders for securities of which they are at the origin makes it possible to determine the “fair” price of the shares , that is to say the one which best reflects their true value. value taking into account the information available on the companies concerned. Traders therefore improve, through their activity, the information of other market participants.

on the other hand, because they ensure market liquidity by acting as counterparties for other participants from whom they purchase the securities they sell, or conversely, by providing them with the shares they wish to acquire.

If these two arguments show that speculative activity is beneficial to the functioning of the stock market, empirical analysis shows that this is not always the case.

Speculation can lead to bubbles

According to classical financial theory, the agents involved in the markets are supposed to behave in a perfectly rational manner , and the financial markets are themselves efficient , that is to say that their functioning de facto allows them to achieve a optimal allocation of savings towards the most economically viable and profitable projects. In this context, stock prices reflect the fundamental value of listed assets and speculation is stabilizing because it corrects any deviation of prices from this fundamental value through purchasing or selling movements of under- or over-listed securities.

However, this conclusion is based on the initial hypothesis that agents involved in financial markets are perfectly rational. However, this hypothesis is too strong as supported by the theory of limited rationality , in particular because economic agents do not always have unlimited access to information.

The empirical analysis also shows that certain stakeholders adopt herd behavior , following the positions taken by other operators without seeking for themselves the information useful for any rational decision. These same agents act irrationally by speculating on the rise in the prices of securities unrelated to their fundamental value, thus favoring the formation of “  speculative bubbles  ” whose bursting generally leads to particularly destabilizing effects for the financial markets and the economy . real, as with the example of the “internet” bubble in 2000.