The Market IS Rigged

For years I have stated, emphatically, that the day-to-day, minute-to-minute stock market is rigged. Individual stock players cannot win! It's that simple. The most recent edge gained by the major players involves time. It turns out that time really is money when it comes to trading stocks. 

These folks are dealing in unimaginably small increments of time. A millisecond is 1/1000th of a second. It takes about 100 milliseconds for you to blink. A microsecond is 1/1,000,000th (that’s millionth) of a second. Today’s high-speed traders are spending millions of dollars to gain a few microseconds over their competitors. When you trade a stock through Schwab or TD Ameritrade, you’re lucky if the transaction happens in seconds.

These high-frequency traders (HFTs) are so fast that they are able to discover a trade is happening before most of the exchanges even see the order. That allows them to manipulate orders to gain a few extra cents on each share of stock sold. With billions of shares trading every day, a few pennies quickly turns into millions of dollars a day.

Every microsecond, of every day, someone, somewhere is gaming the financial system. Knowing it happens and understanding how it happens are quite different. That’s why I am so enjoying reading a new book by Michael Lewis (author of Liar’s Poker and Moneyball), Flash Boys.

Lewis clarifies the opacity that has shrouded Wall Street’s practices for far too long. The author’s sojourn through the dark pools and co-located servers was first discussed on the most recent episode of 60 Minutes.

See it here.

The next morning, the New York Times published an adaptation from the book by Lewis. If you don’t plan to get the book, read this piece.

Read it here (subscription may be required).

Playing stocks is a dirty business. That’s one of the reasons we advise staying away from individual stocks, always! Investing is not playing the market. That’s gambling. Investing is owning the economy. The games that are played on a daily basis on “Wall Street” have little or no effect on someone who owns the market and holds it for years.

Lewis himself said that knowing that the market is rigged shouldn’t concern real investors. It’s only the traders that get “scalped.” When asked if he still invested in a recent CNBC interview, Lewis said that he did and that he “owns index funds” and doesn't “try to time the market.” That is how you should invest.

If you’d like to read the book, the best deal can be found on Amazon where the Kindle edition is just over $9. The iBook edition is $15.

I’ll be talking about this more on the next “Talking Real Money.” I hope you'll subscribe to the podcast.