By Pam Martens and Russ Martens: March 18, 2021 ~
Dennis Kelleher, Co-Founder, President and CEO of Better Markets
There were plenty of fireworks during yesterday’s House Financial Services Committee hearing on the ongoing GameStop trading fiasco and two of the major players involved: retail broker-dealer, Robinhood, which offers free trading accounts to novice investors and provides behavioral messaging like a digital display of confetti when they complete a trade; and Citadel Securities, a giant market-maker that pays Robinhood to route the bulk of its orders to it for execution.
Congressman Jim Himes
The most interesting moment of the day arrived several hours into the hearing in the following exchange between Congressman Jim Himes (D-CT) and a hearing witness, Dennis Kelleher, Co-Founder, President and CEO of Better Markets, a Wall Street watchdog that has been working in the public interest for the past decade. Kelleher holds a law degree from Harvard Law School.
Himes said he wanted to figure out if “what we’re talking about here is saving and investing or whether it is gambling.”
Himes: “I’ve reviewed the literature here. There is no ambiguity. I’ve looked at the academic studies…It’s very, very clear what happens when retail investors trade a lot. Mr. Kelleher, in terms that the folks watching at home can understand, what happens when retail investors trade a lot?”
Kelleher: “They lose and they lose consistently. And they lose because they’re paying more for every single one of their orders because we have an order routing system that is intentionally complex and designed to extract the maximum amount of wealth from the retail investor.”
Himes: “But it’s not just the structure of the system, right? When you look at the literature, retail investors lose because of a whole series of human biases, because they don’t have teams of Ph.Ds studying the stocks that they’re buying, right?”
Kelleher: “Absolutely. It’s like saying let’s send the local Little League team up against the New York Yankees or the Boston Red Sox or the LA Dodgers. Frankly, you have these institutions that have maximum informational advantage, maximum technological advantage, maximum sophistication. They get to use all of that they have paid billions for, for the purpose of extracting wealth.”
Himes: “There’s going to be a distribution curve here. There will be some people who get lucky or who are at the narrow end of the curve who do win. But on average, for the folks at home, the more a retail investor trades, the less well they’re going to do from an investment and savings standpoint. There’s no ambiguity in the literature is there?”
Kelleher: “None at all.”
Himes then turned to Sal Arnuk, a partner, co-founder and co-head of equity trading at Themis Trading LLC. If anyone understands the threat to your wealth from Wall Street, it’s Arnuk, who with the other co-founder of Themis Trading, Joe Saluzzi, wrote the 2012 book Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street Are Destroying Investor Confidence and Your Portfolio.
The exchange went as follows:
Himes: “What’s a smart strategy for a retail investor who actually wants to make money, and save, and invest successfully?”
Arnuk: “He should dollar cost average monthly into Vanguard index funds and buy and hold.”
The problem that many investors will find if they attempt to follow Arnuk’s recommendation is that their 401(k) plan offered by their employer, which for many is the only place they invest, does not offer low-cost Vanguard index funds, but instead offers high fee mutual funds recommended to their employer by some fast-talking Wall Street salesman.
As for how that will work out over the long haul, see PBS Drops Another Bombshell: Wall Street Is Gobbling Up Two-Thirds of Your 401(k).
For our own recommendations on how Wall Street needs to be restructured, see: Reimagining the Structure of Wall Street in the National Interest.
Editor’s Note from Pam Martens: I managed money for retail investors for two decades at two large Wall Street firms. Two of the toughest parts of my job were to talk novice investors out of bad financial impulses and to navigate my clients’ life savings safely through the shark-infested waters created by Wall Street itself.
