The great Charlie Munger (and here I wish I could give you the link to the piece) once compared the stock market to a system of horse racing called pari mutuel. I don’t know much about racing, but from what I gather, the bookies can fix any race. But we know that in every race, exactly one horse must win. If the bookie is to make a profit (apart from his vigorish, which is very like brokers commissions) the amount he pays out to winners must be less than the amount he gains from losing bets. Here is where his skill in quoting odds comes in. The odds are the only data we have. If we knew the volumes of bets at the various odds, we could work out (easily I believe, though I’m too lazy to try) which winning outcome would maximize the profits for the bookie sector as a whole. An excel spreadsheet would do the trick. But that would take the fun out of gambling, or would it.

Similarly, at my brief stint at a large investment bank, I thought it’s cool that we have all this fx price data. Tick by tick and all that. But do you have tick by tick volume data? Can we have a look at both?

And then we could draw a curve of volumes transacted against price, not to be confused with an ordinary demand curve, and see if lot size is inversely related to transaction price, or some such other hypothesis.

Always remember there is a market maker in stocks.

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