To put it plainly, the stock markets are little more than one giant casino. Instead of red and black for roulette, there are "longs" and "shorts"; instead of an array of different card games and games of chance, there are stock indices and investment funds; and just like the blackjack tables, everyone is always doubling down on their lousy bets.
At this point, the cancerous influence of this gambling mindset has spread well beyond Wall St. Now, everyone is part of the game. Retirees have little sense of how their "safe" pensions are really based off of financial tricks and risky strategies. One of the primary evils of this circus tent where sharply dressed men and women play with ordinary people's hard-earned money is that its inner workings are by nature convoluted to prevent the average observer from making sense of the madness.
At least the degenerate gambler is only risking his own fortune instead of throwing caution to the wind with yours.
Betting the Farm on Financialization
Embodied by the greedy stock broker characters that emerged in full force in the 1980s, financialization is the great swindle of our times. Like a rash that only grows as you itch it, over-financialization is very much the norm in the great stock market capitals in New York, London, Tokyo, and elsewhere.
Although the story is much the same across the developed world, the discrepancies from one casino to another keep the public in the dark. It's gotten so bad that even the insiders are losing control of the slot machines: At any given moment, more than 800 different pricing possibilities exist across 12 major stock exchanges around the world. This doesn't even take into account the spurious influence of high-frequency trading (HFT) algorithms that essentially automate the entire scam.
Royal Bank of Canada Investigates
A recent report in the New York Times explains the immensity of the problem:
RBC Capital Markets, the division of the bank which led the research, found that the New York Stock Exchange, Nasdaq and other exchanges make frequent small tweaks to their prices, influencing trading behavior in ways that are hard for even sophisticated investors to understand.
Some of the big mutual fund companies that buy and sell stocks on behalf of investors said that before seeing the RBC research even they had not realized how convoluted the system had become.
“The level of complexity has grown to such an extent that it is unknown to most market participants,” said Mehmet Kinak, the head of electronic trading at T. Rowe Price Group, and a client of RBC with which the research has already been shared. “Instead of finding natural buyers and sellers, we’re finding intermediaries who come in and are benefiting from the complexity.”
The article further explains, "[t]he complexity is a result, in part, of the constant jockeying among exchanges to win business from the biggest traders, many of which are so-called high-frequency trading firms that make money by capitalizing on small changes in prices."
More Than Opaque Prices
Advocates of reforming this insane system have identified a number of others problems with the structure of global stock casino.
There are far too many different standards and rules for how shares are traded. One conspicuous example are "dark pools," where large orders can be placed essentially in secret without tipping off other market participants. In addition, the protocols for what type of trades can be executed vary wildly; an incredible 133 different order types were identified by research conducted in 2014. With so many kinds of trading structures and pricing tiers, it's near-impossible for even the most knowledgeable participants to understand.
“When we trade we don’t even know what it will cost us,” said Rich Steiner, the head of electronic trading strategy at RBC.
On top of it all, the confusion is compounded by the frequency with which fees and incentives (known as rebates) are altered. According to the research by RBC, there were 362 different filings with regulators for changing trading fees between 2012 and 2015 alone—sometimes with multiple fee changes in an individual filing!
Just like the house always wins in the end at the casino, the stock exchanges rely upon the adage "a fool and his money soon do part." For your own financial safety, remember this piece of wisdom instead: Caveat emptor—buyer beware!
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.