What happens if everyone invests in Index funds and stop day trading?

Imagine a society in which all but 10 individuals invest a fixed percentage of their income money in an index fund that in turn buys shares of any publicly listed firm in proportion to its market capitalization. The remaining 10 trade actively. For simplicity, assume that the necessary purchases and sales are done every day at market opening, based on the data from closing at the previous day.

The ten active traders would determine those market capitalizations; everyone else would be along for the ride. If that group of ten colluded, they could extract money from the passive traders conducting straw purchases of a stock to inflate its price (and thus market cap), triggering the index fund to buy it, at which point they can take a profit and divide the spoils among themselves.

This is obviously hugely stylized and exaggerated. But clearly, at some point between no passive investment and overwhelming passive investment, there is a strategic tipping point.

Politically, we have to ask why the mass of passive investors should allow private traders pursuing short term profit maximization strategies to determine the allocation of investment in our society. Wouldn't every vision of the good life be better served by democratically electing the bodies that make the major investment decisions that determine our economic direction, returns to labor, basic infrastructure, etc?

https://www.tandfonline.com/doi/full/10.1080/08935696.2022.2... https://thenextsystem.org/node/204

Wouldn't the value of any stock not included in a fund be almost worthless or un-tradable? I am assuming that day trading is referring to the buy/selling of individual stocks by anyone other than a fund.

With a quick search, I couldn't find the percent volume due to day traders vs institutional and regular retail traders. I think it depends on how much dollar volume they contribute. I feel like it's a relatively small percent compared to institutional trading (algorithmic and manual). I also don't see everyone switching to index funds anytime soon -- people want to get rich quick.

If you include algorithmic trading I think volatility would be reduced because it would be spread over a longer time frame. But that's probably all. Individuals and institutions would still pick individual stocks to try to beat the market, just over a longer time frame.

If all money (or a significant portion) was only invested in index funds, liquidity of individual stocks would decrease. That would result in a counterbalancing increase in volatility.

It's an interesting what-if scenario.

A market's efficiency would increase if traders who is less informed than the average starts index investing instead of trading (poorly). If traders who actually have more information than average go into index investing, you actually might lose market efficiency (by not trading positions that they could profit off more than passive investing).

An increase in market efficiency means the prices of the equities match their true value faster.

There will be patterns of inflow into the different ETFs based on paycheck schedules that would get arbitraged away via day trading.

More questions :

Isn’t the outcome really dependant on the (parent) investement companies' distribution/concentration?

What happens to non-indexed stocks ?

Your question is noob-ly phrased but basically you get ARKK.

What you should be asking is what happens when everyone sells their index funds at once?

(I'll tell you again, just like I told you before I tried to throw an apple at Bill Gates' house from a party boat full of neoliberals: one of the largest drops in the stock market since the 1920s, complete with a plague and Prussia or whatever going buck wild.)