It won't. High frequency trading slices the gap between offer and purchase into an enormous number of tiny slices, and HFT companies compete to see who can collect the most number of slices. But that does not affect the underlying factors that lead to most offers and purchases of stock.
For example you could offer OJ futures at improperly high prices a billion times per second, but that does not mean anyone will buy them. I'm not aware of any evidence that Amazon's weird million-dollar books have affected the price of popular new books.
In addition, I wonder by what criteria one would evaluate how "properly" the markets are functioning. Who decides what is proper? For example, based on the business fundamentals it seems ludicrous to me that Apple would have a lower P/E ratio than GM--but it currently does.
>For example, based on the business fundamentals it seems ludicrous to me that Apple would have a lower P/E ratio than GM--but it currently does.
Their P/E ratios are very similar. Why does that surprise you? Apple is a very mature company. They're currently making huge earnings (which naturally lowers the P/E ratio if those earnings are not expected to continue at that level), and they're a big long-term risk because nobody knows exactly what's going to happen with Android vs. iOS. It's extremely plausible that margins in the smart phone and tablet markets will take a dive in the medium term as a result of vigorous competition, which is where Apple derives the bulk of their profits. Expecting Apple to be doing five years from now as well as they've done for the past five years is to expect them to come out with something new which is as revolutionary as the original iPhone. Maybe they will, but the market obviously isn't betting on that happening.
On the other hand, GM is not doing great earnings wise, but there is no obvious reason to expect that their existing customers are going to evaporate, or that their margins are going to change significantly from what they already are.
My point was that the typical criteria for evaluating a market are the prices that it produces--but reasonable people can disagree about what the prices "should" be. (As evidenced by this sub-thread.)
> In addition, I wonder by what criteria one would evaluate how "properly" the markets are functioning. Who decides what is proper? For example, based on the business fundamentals it seems ludicrous to me that Apple would have a lower P/E ratio than GM--but it currently does.
Couple of things:
1. Reference to Apple PE ratio is likely a market driven phenomenon that has occurred before to the other technology company that grew very large very fast (MSFT) ie. sometime around 2000, most mutual/institutional investment funds literally owned more of MSFT (and now they likely do of AAPL) than they were legally allowed to own. At this cap, given that these buyers are the largest "long term" drivers of a stock's directionality, the stock must change direction. The second part of this effect is that now a bunch of them are underwater, and the psychology of holding a bad trade will affect whether they decide to book the loss (likely they wont for a while). TLDR: Apple is simply too large, relative to the tech sector, for its stock price growth to match its business fundamentals.
2. Re: markets functioning properly - we should remember that the "markets" are literally a construct. For all the logical arguments made about how HFT reduce the bid/offer spreads, I'm philosophically opposed to them. Mark Cuban has articulated why better than I can: http://blogmaverick.com/2010/05/09/what-business-is-wall-str...
In a nutshell, if we constructed the markets fundamentally to make it easier for businesses in the real economy to raise and price capital, and HFT starts to account for a multiple of that, then the purpose of the "market" construct has been hijacked.
This leads to all sorts of gnarly questions about how to decide what the right volume is etc, so I recognize its'a thorny area - just pointing out that HFT is not so benign, and oftentime comes with consequences that far outweigh the benefit, and happen too often to ignore.
Playing devil's advocate here: if you believe the purpose of the market is to help long-term investors buy and sell at rational/efficient prices (in other words, price discovery), then why is relative volumes of HFT vs. long-term investment relavent.
I'm not saying it's the best metric, or even a good metric, but there's quantitative evidence that when new news comes out and prices move rapidly, HFT reduces the time it takes for markets to settle down after big price moves. By many measures, this makes the markets more rough, since prices move more abruptly. On the other hand, with more rapid price discovery, fewer long-term investors trade at non-consensus prices during the transition period.
The ones that say Apple has the vision and skill to enter and exploit many more massive untapped markets as we've seen them do repeatedly compared to GM's fairly static markets?
For example you could offer OJ futures at improperly high prices a billion times per second, but that does not mean anyone will buy them. I'm not aware of any evidence that Amazon's weird million-dollar books have affected the price of popular new books.
In addition, I wonder by what criteria one would evaluate how "properly" the markets are functioning. Who decides what is proper? For example, based on the business fundamentals it seems ludicrous to me that Apple would have a lower P/E ratio than GM--but it currently does.