My Turn: Wall Street’s dangerous game
Is the U.S. stock market a rigged game?
I am often asked this question. This concern re-surfaced in earnest this past spring with the release of Michael Lewis’s book, Flash Boys, a well-written examination of how Wall Street routinely manipulates our stock and bond markets.
Lewis’s prior book, The Big Short, also created quite a stir upon its publication in 2010 because it describes Wall Street’s frenetic and self-dealing environment that in large part led to the 2007-2009 Great Recession.
Is Lewis right? Is the U.S. stock market a rigged game? Unfortunately, the answer is oftentimes, “yes.”
Lewis and other market-watchers highlight how large securities traders construct so-called algorithmic computer trading models that, in effect, front-run by milliseconds the trades of ordinary retail investors (meaning Main Street continues to be taken advantage of by Wall Street). This results in an unfair trading advantage by some wily market participants – so-called “high frequency trading” now constitutes more than 50 percent of the daily trading volume of the U.S. public securities exchanges.
For sure, the average Main Street investor does not trust securities market-makers; without understanding the technicalities of why or how the game may be rigged, he just knows it is, having witnessed two unprecedented major downturns in the markets between 2000-2009.
And that experience has left Main Street investors wary and largely on the sidelines during the recent market run-up because of such well-founded mistrust. And fundamentally, that is a bigger problem.
Market professionals, including Warren Buffett, respond to the Flash Boys culture by correctly pointing out the average investor should not be investing on a short-term basis. A day-trading mentality is just self-defeating.
Engaging in short-term trading as well as just throwing one’s proverbial hands up and staying out of the securities market are just not the right courses of action for most Main Street investors. With all its faults and challenges, the market over the long haul can much more readily help average investors save for retirement than either holding cash or speculating on various ventures with the “house” money.
Constructing a well-diversified portfolio is the only way most people should invest, because as I learned when I was being trained in my first financial job – an analyst at First Chicago in that city – my boss said something I have always remembered: “Mark, it doesn’t matter what exact price you pay for Proctor and Gamble if you’re going to hold it for several years.”
Today’s high-frequency traders should also get back to a long-term mindset.
Gaming the financial markets hurts our financial markets and does not build long-term value for our economy. Such gamesmanship cannot truly create jobs or develop innovative new industries that will drive this nation’s long-term future growth.
If we don’t throttle back Wall Street’s excesses, the next big industry-induced financial mess could lead to another Great Depression. Reform is long overdue. Our very economic future depends on it.
(Mark Connolly served as director of securities regulation for the state of New Hampshire from 2002-2010 and now owns New Castle Investment Advisors, LLC, a portfolio management firm located in Portsmouth.)