Listen very carefully: today, I’m going to explain how financial markets work. I shall use the performance of the FTSE 100 share index yesterday as a case study to illustrate everything you need to know. It’s all about trading-floor psychology and market sentiment.
(Chart from the BBC.)
The London Stock Exchange opened at 8.00 a.m. This early start so dismayed the traders that the FTSE promptly dropped over 200 points. Not all of them were even in by then.
It then bobbed up and down a bit as they checked their emails and whether they’d made any pretend Facebook friends overnight, and by 8.30, as they were getting some coffee into them, things picked up a bit. As 9.00 neared, the sight of other people rushing through the streets to get to work amused them, providing a further boost to shares. After this point, though, the fun wore off and things just bumbled along for a bit.
There was another injection of caffeinated liquidity into the market just before 10.00, which had the usual energising result. However, by this stage the markets were starting to realise that they still had another two hours of the morning left, and – barring the fire alarm test at 10.30 – nothing was really going to happen. And so, nothing much did. This is known as rational expectations theory, and if you drop this phrase casually into the conversation at cocktail parties, then boring people will be impressed and want to sleep with you.
At noon, the FTSE started to drift downwards as the traders went out for lunch, leaving a work experience kid and two temps whose names nobody knew in charge of the stock market. Luckily, none of them had a login for the system and so couldn’t cause any real damage.
The traders got back in around 1.00, and nosed around surreptitiously on the internet until the managers went off to lunch (they, of course, get in to work later). Unsupervised, they decided to mess around with the graph to kill the boredom of the early afternoon, with an initially euphoric leap, but they made sure to get it back to where it had been by the time the bosses got back.
One of them was asked who’d been responsible for all the sudden activity, and replied vaguely that there’d been an unusually high level of trading. This was technically true, although most of that trading had been on eBay.
The New York Stock Exchange opened at 2.00. Here I’m afraid I have to explain a little economics, but do bear with me, as it’s vital to grasping how this all works.
America has much, much more money than Britain.
This means that when they start trading, anything we might do is going to be irrelevant by comparison. So, from 2.00, our traders were able to slack off some more for a while without being noticed. As a result, very little happened. After half an hour or so, the managers cottoned on and discreetly asked how things were going, prompting another flurry of activity. One of the temps was sent out to Starbucks.
As going-home time drew nearer and nearer, the mood among the trading floor grew more and more bullish, pushing the FTSE to a one-day high. This was marred only by the sudden gloomy realisation, just before close of trading, that they were going to have to get home via the Tube.
You see, once you appreciate how these people think, it really becomes very simple to understand. I confidently predict the same pattern today.