Comment: Cohen, Maier, Schwartz and Whitcomb Paper

Extract

The paper by Cohen, Maier, Schwartz, and Whitcomb (CMSW) presents the authors' comments on previous literature about bid-ask spreads in securities markets and the way in which they are formed and also gives a number of the authors' own ideas on the topic. I have a few comments on what they have to say in both of these categories, but I will emphasize the latter, since I find it more interesting to comment on their own assertions than to comment on their comments about others. In this and previous versions of their paper and previous papers on the same topic, CMSW have explained that they view price movements over time in securities markets as being partly the result of underlying economic changes and partly a reflection of the impact of idiosyncratic orders that come in from individual investors. On the latter point, I do not find their view very convincing. Individuals decide to trade a security, I believe, for essentially one of two reasons: a desire to change their cash balances or a result of a change in probability beliefs about future returns. I do not believe that either of these situations will result in an impact on security price unless they influence to action at the same time large numbers of investors, in which case they represent exactly the source of underlying economic changes which ought to affect price.