Predatory Manipulators Feed on Investor Portfolios
Our effort to expose, if not cast out, evil high frequency trading spirits continues! Today the White Top View Series, High Frequency Trading unmasks another devil of an evil inside practice that consumes investor capital. The White Top series began with links to the CBS News program segment on, 60 Minutes, Exposed! Market Rigging and High Frequency Trading. Based on the great book by Michael Lewis, Flash Boys, that program blew the cover off the well hidden stock market evil of market rigging by high frequency trading.
Links to all parts of the White Top View Series, High Frequency Trading are at the end of this post.
Greedy Manipulators Float Numerous Phantom Arguments
Anyone convinced being a victim is good, needs serious counseling. Anyone saying you or your investments benefit from high frequency trading is pitching toxic investment snake oil. Statements plotting to convince you being a victim has benefits are nonsense. Investor portfolios get picked as the source of the billions this unfair market rigging delivers to predators.
Like victims of any other abuse or manipulation, allowing the unfair predation of high frequency trading, takes from victim investors only benefitting the market predators. The benefits exceed billions of dollars going to a relative handful of market insiders. You, me or all other buy side investors are not in that unfairly privileged group. Legitimate buy side investors receive no benefits from being ripped off by these high frequency trading market riggers.
Those supporting the rigging of capital markets claim four major advantages that are most often selected from a long list of nonsense or mythical benefits. The big four phantom claims are: better volumes, superior price discovery, market making and narrowed price spreads.
In Market Babel And High Frequency Trading, the last White Top blog post, we covered the first phantom claim, better volumes. Today we deal with the next phantom claim, superior price discovery.
Bogus Price Discovery – Exorcising Another High Frequency Trading Devil
High frequency traders provide bogus price discovery, not superior price discovery. The apologists and some pundits claim high frequency trading activity delivers superior price discovery that benefits you and the market. To see through this ghostly nonsense claim, we must understand the price discovery process or mechanism.
Price discovery simply means buyers and sellers interact or bargain to arrive at, or discover, the price for a specific item at a specific time. Like striking a bargain at a garage sale; you dicker to discover a mutually acceptable price between a buyer and a seller. Many changeable interacting factors continually cause buyers and sellers to adjust and raise or lower the discovered price.
The principal factors, affecting price in an open and fair market, include numbers and size of buyers, sellers, market, location, perception, bidding, settlement, liquidity and information. Increasing the number, amount or weight of any factor can directly and immediately affect and change the price.
That all makes it seem perfectly logical to claim the immense share volumes, generated by high frequency trading activity, aids the price discovery process.
However, such bogus claims are naïve, uninformed or simply made with deception in mind. Deceptive claims hope to either delude or distract investors. All high frequency trading volume exists only to prey on the orders of real investors. Price discovery has nothing to do with it. It is all about discovering orders from you, me or any other real investor.
High frequency trading has absolutely nothing to do with helping you. High frequency traders do generate buy and sell orders. Those orders are not to discover market price. Those orders exist only to discover your order and the price you are willing to pay. Of course, not just your order. Yes, I know, you are special, but it is not just all about you! High Frequency traders want to prey on all orders from you and any other real investor.
Once discovering what an investor will pay, they happily race ahead of the order to buy on any other market for less. That means they can buy for even microscopically less than what you can! Yes, your broker and exchanges are in on this! When successful, they instantly sell to you at that higher price. A fraction or a penny here, a nickel there and soon we are talking billions! Just repeat that process millions of times to produce billions of real dollars picked from investor pickets.
All this gets done at almost no risk! The high frequency trading technology and those that support it have created the only 100% guaranteed profitable trading system ever invented! Nice gig if you can get it! And being absolutely clear, no, you or I can’t do this!
High frequency traders are completely indifferent to any market price or direction. To work their rip off, they need you, me or another real investor to place a buy or sell order. Their technology and inside advantages do the rest. Investors are unwitting victims to this profit skimming from the almost all real buy or sell orders.
In this case, ‘dumb investor’ or ‘dumb money’ could be substituted for any ‘real investor’. Those real investors do not just include small investors like you and me with mere thousands or even millions, but all buy side investors including pension funds and investment managers with billions they must put in the market!
Appallingly, regulators, exchanges and your broker are just fine with it! They all make money from this evil arrangement! How do you feel about that? Give them and call and be sure to let me know how that goes! Anyone that actually gets to talk to a regulator gets extra points!!!
We are not done with this topic…there is more to come in pending posts!
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Links to the White Top View Series, High Frequency Trading
Part 2: High Frequency Trading and You