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The market, right now, is functioning pretty strangely, partly because sales were effectively suspended for many months. So what happens when there& #39;s a glut of sales in a market? Read on for a case study from the art world, and what this might mean for FI
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Classical economic theory has it that prices immediately reduce when there& #39;s a glut of sales. And we have definitely seen that in FI. But actually prices held up remarkably well for a while, with significant additional volatility, even before FI& #39;s interventions. Why?
One interesting case for what happens when there is a glut of sales in a market where a handful of individuals hold a lot of power, is Damien Hurst& #39;s 2008 auction, on the same day Lehman Bros collapsed, where he flooded the market with his art https://www.economist.com/books-and-arts/2010/09/09/hands-up-for-hirst">https://www.economist.com/books-and...
In this instance, investors absolutely poured money in, taking valuations of Hirst& #39;s works to new heights, with some doing so to protect previous investments, and others getting in on the act for the first time
In the years afterwards, Hirst& #39;s works dropped significantly in value, and it took a while to recover. But that initial bump in value is unexpected by classical economic models. So what gives?
On FI, apart from Black Sunday, we saw the prices, in today& #39;s terms, hold up relatively well, with big accounts flaunting their & #39;snapping up of value& #39; and perhaps some market maker activity
These big accounts were motivated by value, most likely also by making the market appear to be able to absorb the sales, prop up prices, and by keeping panic levels lower
But over time, those buyers have been unable to hold prices up, and today we see an absence of IS prices for many of the big hitters. This is akin to Hirst circa 2010
The analogy isn& #39;t at all perfect. But I think in particular, as FI aims to take on larger investors, some of whom could eventually be very big, it& #39;s worth considering the motivations of big fish in small ponds, and of the kinds of market irrationalities we are likely to see
They& #39;ll invest in specific holds. They will recognise the market power they have. They may attempt to keep prices of these players up against the flow of the market. And if they are big enough, they may even succeed
Right now it& #39;s essentially impossible to know how big the biggest fish will eventually be, and what % they will be of the market. FI is truly a tiny pond right now, in UK alternative assets terms, and could grow very substantially
But if big fish enter early, we could see some very strange market dynamics - big surges in particular players. Weird stability in their prices above a certain level against market trends. And price moves that don& #39;t really reflect action on the pitch
