Anomaly-based funds profit by making markets rather than trading as customers

Evidence

Dimensional avoided an exact index-tracking strategy that would have left it little or no discretion over the content and timing of sales and purchases. Instead of being a customer, paying in order to trade, it successfully positioned itself as in effect a market maker, making money out of trading (Keim 1999; Cohen 2002). It encouraged other participants in the market for small stocks to offer it blocks of stock that they wanted to sell, so that it was able to buy at a discount rather than paying a premium. — Donald MacKenzie, An Engine, Not a Camera, 443

Categorization

• XREF: Connects to the general theme across this book and to behavioral finance literature on market microstructure — how the practical implementation of an academic idea reshapes the market it enters. — connects to: Finance generated profits by pumping undervalued asset classes for twenty-five years — Mark Blyth, Austerity: The History of a Dangerous…, 627; Market makers profit from the buy-sell spread by providing liquidity. — Kean Birch, Rethinking Value in the Bio-economy:…, 121; Market actions based on efficient-market models can create anomalies those models cannot explain — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1166 (+1 more)

Broader Connections

• Market actions based on efficient-market models can create anomalies those models cannot explain #corroborates (0.72) — Donald MacKenzie, An Engine, Not a Camera, 1166