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Chapter 3. Causing the Bubble > Day Trading and the Source of the Bubble

Day Trading and the Source of the Bubble

It's a fundamental rule of market economics, but one too little understood by most people, that prices are determined at the margin—or in the case of the Internet bubble, by the margin. This means that for some stocks a small increase in demand can create a big price increase, just as only a small decrease in demand can cause the price of a product to take a steep fall.

This situation emerged in the market for Internet stocks with the advent of a new player—the day trader. With the ability to trade online, quickly and continuously, the day trader created a whole new category of demand, to which the market quickly responded. Analysts estimated that at its height, day trading made up almost 18 percent of the trading volume of the New York Stock Exchange and the Nasdaq in 2000.[7] Sites such as Yahoo! Finance grew in popularity, while chat rooms devoted to stocks and trading proliferated.[8]


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