Business Day

Rigged stock markets load dice in favour of insiders who coin it

• Bourses all too often cause losses to those who rely on them to provide a fair trade

- MICHEL PIREU

Take a speculativ­e cocktail shaker. Add four parts public ignorance and 33 parts greed. Toss in a little perceived genius. If you don’t have any freshly ground perceived genius to hand, a little dried genius status will do. Season generously with mystique. Add apparent publicity shyness to taste. Serve in opaque tumbler of awes, ill-informed media coverage.” — Martin Baker.

A con is an intentiona­l deception to cause a person to give up property or some lawful right. Con games are crimes of persuasion and deception. The victim always trusts the swindler in some way.

Does this definition of a con fit the stock market? Is the stock market a con?

It would be hard to deny that causing a loss to those who rely on it to provide a fair trade in the ever-increasing number of products and services it offers is all too often what the market ends up doing due to various deceits, and always has done, whatever its intention.

As the Huffington Post highlights in tracing the history of the US markets: “The trading of commoditie­s futures on the Chicago Board of Trade ignited a fervour for speculatio­n, but only the wealthy could afford the steep margin requiremen­ts to participat­e on the exchange.

“Bucket shops arose to sate the appetite. There, a clerk or farmer could place a side bet on the direction of a given stock without actually purchasing any shares. Little did they know the betting was almost always rigged against them.

“Bucket-shop proprietor­s made the working class feel as if they were breaking into the rarefied realm of high finance, until the new century when they finally did. In the early 20th century, the big con exploded onto the scene. In an intricatel­y designed piece of theatre … the swindler convinced his mark that he was the lucky recipient of insider informatio­n on the stock exchange. He would place ever-increasing orders for stocks on the assumption that he couldn’t possibly lose.

“It was the perfect game for a roaring economy, a financial market that was beginning to open itself up to the middle class, and a system which had always thrived by tolerating a bit of fraud to add liquidity.”

It doesn’t take much to detect that legacy in today’s landscape. If the market is not a con, it’s certainly rigged — in the sense that it systematic­ally disadvanta­ges certain people; invariably those who know the least.

Despite the rules and governing bodies that exist to level the playing field, the bigger players have an undeniable advantage, through research analysts, timely access to privileged informatio­n, huge amounts of capital and the wherewitha­l to develop sophistica­ted trading programs.

Perhaps the most damaging of these is the inequity that exists in the disseminat­ion of informatio­n that is so crucial. The internet is somewhat of an equalising factor, but institutio­nal clients invariably know the outcome of informatio­n before the investing public does.

One can argue that these are institutio­nal advantages, nothing more. But where it starts to feel like more is when we are asked to believe that these imbalances should not discourage us from striving to achieve our goals; that by monitoring our investment­s, taking risk-mitigation steps and keeping informed of general investment themes or trends, we can still succeed in our trading endeavours.

Anyone who knows the Brad Katsuyama story — what it took to rectify the situation created by high-frequency traders — will know that most exchanges’ willingnes­s to “queer the game” goes well beyond turning a blind eye to intermedia­ries taking advantage of investors.

“It is no accident that most investors lose money in the stock market,” says Richard Ney in his book, The Wall Street

Gang. “Regrettabl­y, the arrangemen­ts that exist to preserve the traditions and legalise the frauds of the security industry are inseparabl­e from the general organisati­on of a society controlled by the financial establishm­ent, a society whose laws and principal customs have been contrived to serve the special interests of the financial community,” Ney writes.

Nor can those on the inside be expected to acknowledg­e that the system is at best flawed, at worst fraudulent. Not when they amass many billions from it every year.

As to who might be the victim, that’s easy enough to say: look in the mirror. Don’t think you can be conned? Congratula­tions, you have just become the perfect mark. You don’t have to be a wild schemer or overly greedy to qualify. If you’re willing to take a chance, that will do.

Tamar Frankel of Boston University studied hundreds of financial cons, looking for recurring patterns. One set describes the traits of the victims. “They tend to be trusting, have a high risk tolerance, and — especially the more educated ones — have a need to feel exclusive, or part of a special group.”

They also tend to be dissatisfi­ed with their economic status, envious of their economic neighbours, with a fear of being left behind. Sound familiar?

How to avoid becoming a mark? Possessing enough scepticism of everyone and everything. Questionin­g the possibilit­y of certainty in knowledge until the last shred of evidence is evaluated. Looking at everything from every angle. Ask: what’s the point of the stock market (if not to fleece you)?

The usual answers include a way for companies to raise capital, best allocate resources, and spread wealth (it trickles down, they say). But when Brendan McSweeney at the University of London searched for evidence to support these claims, he concluded that in fact there isn’t much point to the markets at all.

The UK market, he found, provides less than 20% of the funds companies need to grow and fails on most other measures. Few companies issue shares to finance new investment projects. They tend to be mainly used to provide an exit for investors, take over other firms, or simply pay off loans.

To quote Michael Lewis: “The world clings to its old mental picture of the stock market because it’s comforting. Because it’s so hard to draw a picture of what has replaced it; and because the few people able to draw it for you have no interest in doing so.”

VICTIMS TEND TO BE TRUSTING, HAVE A HIGH RISK TOLERANCE, AND HAVE A NEED TO FEEL EXCLUSIVE

 ?? /Reuters ?? Flawed: A trader in the 10-year bond options pit at the Chicago Board of Trade signals orders.
/Reuters Flawed: A trader in the 10-year bond options pit at the Chicago Board of Trade signals orders.

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