When 1,700 mutual funds and an array of pension funds, trusts, foundations, endowments and other institutions seek to buy or sell from a list of perhaps 3,500 listed stocks, you can have problems.
One of those problems is illiquidity, or the inability to match buyers with sellers within a limited time and without allowing prices to surge or plunge. Liquidity is fluid, orderly; illiquidity is spastic, volatile.Liquidity depends on a randomness of opinion, on a mixture of buyers and sellers with differing ideas about what to buy or sell at any particular time.
It is the very basis of successful securities markets - bringing buyers and sellers together - and officials of the big exchanges have made many speeches lauding the ability of their outfits to do just that.
But, in recent years its occasional and dramatic absences have created financial earthquakes, with prices plunging or surging because everyone wanted to sell or everyone wanted to buy at the same time.
While the number of institutional investors has grown, the growth of individuals who invest directly has not, a trend not helped by the big crash two years ago. Institutions have changed their personality too. They have become more active traders, rather than investors.
As a result, the overwhelming volume of buying and selling on almost any day now is institutional rather than individual. Individuals haven't deserted the securities markets altogether, but many prefer to invest through funds.
Federal Reserve records show that since 1968 households have been net sellers of stocks in all but one year. In that time, household financial assets held as common stocks have shrunk to 19.6 percent from 43.4 percent.
In 1984, households reduced their direct ownership by $75.6 billion, in 1985 by $103.4 billion, in 1986 by $121.6 billion, in 1987 by $99.3 billion and in 1988 by $105.5 billion. The annual rate this year is higher.
Who has been buying? Foreigners for one, though they lost some enthusiasm last year and this. Mutual funds, of course, although they too lightened up last year. But most of all, state-local government retirement funds.
Why the latter are such eager buyers isn't quite clear, but they have been consistent. From 1984 through 1988 they added $111.5 billion to their holdings, and they have continued their buying into 1989.
What these numbers add up to is a trend toward less randomness of opinion in the marketplace. Offsetting the potentially volatile effects of this concentration, at least to some unmeasurable extent, has been technology.
Seeking to maintain liquidity, major exchanges have greatly expanded their capacity to handle not just higher volume but explosions of volume and sudden turns. Exchanges have vastly more capacity than just a few years ago.
Technology, however, has opposite impacts too, one of them being the speed with which huge sellers, or combinations of them, can suddenly dump stocks onto the market, often by the automatic trigger of a computer program.
Defenders of the marketplace cite what they say has been a relatively low average level of illiquidity - regardless of outbursts - and that big markets naturally tend to produce big numbers of every sort, gains and losses included.