Amateur hot stocks -- as appears in Forbes Online, 1/25/99

Below are the top five o-t-c (over-the-counter) stocks, in order of volume, in which marketmakers for on-line brokers recently traded. For a complete listing of the top 25, see the full table.

Increasing market volatility

So daytrading causes significant fluctuations in the market -- so what?

In general, individuals are risk-averse: this is why insurance, pensions, and savings accounts exist. On the whole, people are willing to pay a premium to eliminate the risk of "losing it all" -- one's house to a fire, perhaps, or one's money to a thief -- even if this risk if very small. Banks, insurance companies, and similar institutions operate on this premise. However, the daytrader gamblers do not share this philosophy, and their risk-seeking actions constantly render the market unstable. This instability would not pose a problem except for the fact that the above-mentioned banks and insurance companies participate in the same market as the daytraders do. Since they share this single market, the effects become critical: the higher the risks, the higher the prices -- insuring possessions and keeping savings secure is becoming increasingly difficult for the average individual.

Higher risk makes it more expensive to insure things. There is a positive correlation between risk and the price of a security (the riskier something it is, the more expensive it is. This correlation is why treasury bonds give a very, very low rate of return. They are "no risk" securities). If the stock market is riskier, stocks will be more expensive. If stocks are more expensive, it makes it more difficult for companies to raise capital and eliminates some of the investing opportunity for the rest of us. It also makes things like pension funds and insurance companies worse off, in turn making all of us worse off

Half of the traded volume for some companies is done online (see Forbes table, 1/25/99). The increased volatility of the market, especially for companies that are favored by the daytraders, creates a real risk of a company getting "swept along" without any sort of safety net or flexibility in case of sudden market downturns. A Forbes article explains: The caution flag is out. Bernard Madoff is head of the market-making firm Madoff & Co. and is also chairman of the trading committee for the Securities Industry Association. He's urging on-line brokers to tell their clients that highly volatile stocks like Amazon and Yahoo! are likely to face a severe lack of liquidity during a downturn or a prick in the Internet stock bubble.

"The problem is, there is no buffer between the customer and his own tools of self-destruction," says Madoff.