Markets Are Rigged!

One of the reasons I will never become wealthy writing financial pieces is because I’m way too brutally honest about, and way too critical of, current markets; and here I go again — in short, they’re rigged!

When I initially had the idea to create a financial blog site, I wanted it to be a place where people could come to learn about “investing” wisely. Though, in the past, I have discussed trading strategies, I don’t believe that individual traders have any chances of beating the “Black Box,” algorithmic trading systems employed by most of the largest trading firms. A great video segment, which can be found here, was recently produced by Yahoo! Finance on that very subject. Please watch it and then come back. I’ll wait. I promise.

Okay, what did you think of the video? Interesting? Depressing? Both? Well, personally, I found it to be annoying — not the video itself, but the very fact that the SEC allows firms to get away with such chicanery. Did you hear the part about Reuters selling early access to its financial news releases? Do you know what that is about? Well, apparently the story goes something like this:

A closely watched consumer confidence number that routinely moves markets upon release is accessed by an elite group of traders, for a fee, a full two seconds before its official release, according to a document obtained by CNBC.

A contract signed by Thomson Reuters, the news agency and data provider, and the University of Michigan, which produces the widely cited economic statistic, stipulates that the data will be posted on the web for the general public at 10 a.m. on the days it is released.

Five minutes before that, at 9:55 a.m., the data is distributed on a conference call for Thomson Reuters’ paying clients, who are given certain headline numbers.

But the contract carves out an even more elite group of clients, who subscribe to the “ultra-low latency distribution platform,” or high-speed data feed, offered by Thomson Reuters. Those most elite clients receive the information in a specialized format tailor-made for computer-driven algorithmic trading at 9:54:58.000, according to the terms of the contract. On occasion, they could get the data even earlier—the contract allows for a plus or minus 500 milliseconds margin of error.

In the ultra-fast world of high-speed computerized markets, 500 milliseconds is more than enough time to execute trades in stocks and futures that would be affected by the soon-to-be-public news. Two seconds, the amount promised to “low latency” customers, is an eternity.

[For the whole CNBC story click here.]

Galling — no? It is for reasons like this one that individual investors stand no chance at beating, or even coming close to matching, the performance of big institutional investors. Personally, that which I find most upsetting about the whole situation is that companies, whose stock prices are most affected by this type of behavior, actually go along with the game. You’ve heard the old saying: Buy on the rumor, sell on the news — right? Well, here’s the rub — they are not actually rumors. In fact, those “rumors” are inside information that is used to help large institutional traders and hedge fund managers take the other side of the trade.

Have you ever wondered why it is that a company can report a banner quarter, yet the company’s stock price takes a nose dive after the announcement is made. Well, it’s because as we, the “individual” investors, pile into the stock on the exciting news, institutional investors and large hedge fund money managers are on the other side of the story preparing their short sale trades. Essentially, they are using us like an ATM; as we deposit our cash into the Stock Market Machine, they are on the other side pulling it out. They create a scare by driving the company’s stock price down with their short sales which, essentially, gets us to question our judgments and decision making process. Eventually, and often much too late, we  jump out of our investments/trades with losses, leaving us to wonder where we went wrong in our investment thesis. It is truly a criminal enterprise, and the only way to fight back is to not play the game: You can’t lose if you don’t play!

Fortunately, there are smart and safe ways to generate wealth, but they tend to be “boring;” but boring can be a good thing when it comes to investing. Boring leaves us more time to do the things that are, and should be, more important to us — like spending more time with family and loved ones; or by leaving us more time to do the things we love to do. Learn to be bored, and look into investing in quality index funds and ETFs. Buy into low cost, broad and highly diversified stock and bond mutual funds and/or ETFs, and then sit back and wait for the next Apple or Google to come along so that you can begin to work toward building your own, small, yet diversified, fund. Be skeptical and question everything you read and hear — especially when it comes to money and/or your investments.

Some of the best and least costly funds and ETFs I have found belong to Vanguard’s family of mutual funds and investment securities. If you care to investigate them further, you can simply click here. If you have any specific questions, please leave a comment, or contact me directly, and I will do my very best to answer them for you.

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