By Pam Martens: November 26, 2014
The way the 200-year old publishing house, John Wiley & Sons, is pumping out books enticing average folks to trade the markets, one might be inclined to forget that 2014 will go down in history as the year when there were more charges of rigged markets on television, in courtrooms, at Senate hearings, and in prosecutors’ offices than at any time in the history of markets. If ever there was a time less conducive to trying your hand at trading, I can’t think of it, although October 29, 1929 might be a contender.
Wiley says it “provides everything the trader needs to survive and succeed in every kind of market.” But if every market is rigged against even highly sophisticated traders, how could a rookie with a little book learning succeed?
Let’s review what we’ve learned so far this year. On March 30, author Michael Lewis, who previously worked on the iconic trading floor of Salomon Brothers, went on 60 Minutes with professional trader Brad Katsuyama to explain to the world that “The United States stock market, the most iconic market in global capitalism is rigged.”
When asked by interviewer Steve Kroft who it is that’s rigging the market, Lewis replied: “By a combination of these stock exchanges, the big Wall Street banks and high-frequency traders…” Lewis goes on to explain that “High-frequency traders, big Wall Street firms and stock exchanges have spent billions to gain an advantage of a millisecond for themselves and their customers, just to get a peek at stock market prices and orders a flash before everyone else, along with the opportunity to act on it.”
With that knowledge, according to Lewis, these traders are able to front run your order. Katsuyama, a professional trader at the Royal Bank of Canada who later started his own firm, said the market would seem willing to sell him a stock but when he went to buy it, the price went up. It felt like someone knew what he was going to do – because they did. High frequency traders who could afford to spend millions to gain a millisecond advantage at seeing market prices faster could front run the slower trader’s order.
If the stock market is rigged, maybe you could use some of those Wiley books on trading the futures’ markets instead. According to three veteran traders who have filed a lawsuit in Chicago, the futures market is rigged also. Their court filing explains how the rigging works:
“HFTs [high frequency traders] continuously place small bids and offers (called bait) at the back of order queues to gain directional clues. If the bait orders are hit, the algorithm will place follow-up orders to either accumulate favorable positions or exit ‘toxic’ risks, a process which leverages bait orders to gain valuable directional clues as to which way the market will likely move. The initial bait orders are very small while subsequent orders, once market direction has been identified, are very large. A portion of the large orders that follow the smaller bait orders are wash trades.”
If you could afford to spend millions hiring a bunch of Russian coders like the big boys on Wall Street to write your own trading algorithms, you might be able to compete. If not, it’s highly unlikely a Wiley trading book under your arm will do the trick.
You may also have to spend billions buying up industrial commodities like oil, aluminum and uranium so that you have an insider’s early peek at where prices are going, or, better yet, you can control the prices while you trade. According to the Senate’s Permanent Subcommittee on Investigations’ 396-page report released last week, that’s what the mega Wall Street banks are doing.
Well, if stock and commodity futures are out, maybe you could try your hand at trading currencies. Wiley has a book on that as well. Unfortunately, as we reported two weeks ago, U.S., U.K. and Swiss regulators say that market has been rigged by insiders. Criminal investigations are underway.
One Wiley book that caught our eye is “The Part-Time Trader: Trading Stock as a Part-Time Venture” by Ryan Mallory. It sells for the lofty price of $60.00. The promo for the book informs us that: “Millions of people trade stocks in their spare time, supplementing their nine-to-five income with extra profits on the market.” Shouldn’t there also be a caveat that these folks might also deplete their nine-to-five income with losses?
The promo goes on to reassure us that “This handy guide equips part-time traders with all the necessary tools for successful trading — including guidance on pre-market/pre-work studies and how to make profitable trades without interfering with one’s day job.”
If professional traders can’t succeed in these markets because they are rigged against them, what is the likelihood that a part-time rookie with a full time job will succeed?
And then there’s the question as to whether trading, as opposed to long-term investing, is even good for the country. Here’s how John Bogle, founder of the Vanguard mutual fund family, explained trading in a speech on April 28, 2014:
“But it is only capital formation that adds value to our society. Trading, by definition, subtracts value. Indeed, the casino mentality remains in the catbird seat of finance. Is that good or bad for investors and for our society? As Nobel Laureate in Economic Sciences and New York Times columnist Paul Krugman recently put it, ‘society is devoting an ever-growing share of its resources to financial wheeling and dealing, while getting little or nothing in return.’
“I might go even further, and suggest that we are getting less than nothing in return. More broadly, be warned by these words of wisdom from the great British economist John Maynard Keynes in 1936: ‘When enterprise becomes a mere bubble on a whirlpool of speculation, the position is serious. For when the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.’ ”