Wall Street Mysteries

"Short-term traders, like Renaissance, may be helpful to long-term investors. When you put savings into a stock index fund, the managers of that fund need to buy stocks. If they cannot do so without paying a large premium over the current prices for those stocks, then your returns will be undermined. What you want instead is for the mutual fund to find that the market is liquid, meaning that it can make new purchases without having to pay premium prices.

Short-term traders like Renaissance may be the suppliers of liquidity in this instance. If they spot a temporary rise in share prices as the mutual fund makes its purchases, the short-term traders may sell, expecting to profit as soon as the short-term blip gets reversed. When many traders compete for these profits, market liquidity improves and the mutual fund is able to make its purchases with little or no effect on the prices it pays."