One Year Later: It's even worse for small investors
Filed under: Investing, Goldman Sachs , One Year Later
A year after the markets crashed, Wall Street salaries have recovered nicely, bank stocks have bounced back and the economy is apparently on the rise again. Yet, the investment game is more rigged than ever before. The retail investor has never been at a greater disadvantage -- not that retail investors were ever really supposed to win. A quick read of the anti-Wall Street classic Where Are the Customer's Yachts? tells you pretty much everything you need to know about how brokerages and other Wall Street sharks view customers. But the crash provided cover for developments that are clearly anti-retail investor and have been largely ignored by the authorities charged with enforcing fairness on stock markets. Let us count the ways.
High frequency trading, dark pools, and flash orders have allowed big hedge funds and trading houses to see large buy and sell orders before other participants, making it easy for them to steal profits from retail customers placing trades in the same securities. To tap into this data, hedge funds and large brokerage houses built complex computer algorithms to convert early warnings on trade requests into rapid-fire buy and sell orders.
This behavior has been going on for years, but in the booming pre-crash stock market, this inherent advantage was never questioned. A slew of hedge funds basically built their businesses around making small profits through seeing prices before anyone else. How much has this cost individual investors? Likely billions of dollars each year. And this has become a major issue because the proportion of high-speed trading in the markets has grown to represent a significant chunk of total U.S. trading -- over 50 percent, by some estimates, according to ZeroHedge. According to economist and New York Times pundit Paul Krugman, high frequency trading adds no economic value to the market and, instead, rewards bad behavior.
The market crash has also hastened the decline of so-called sell-side research. This is research sponsored by large brokerage companies and made available to all customers. This research is also widely available through many retail stock brokerages. Sell-side research formerly was profitable. Investors would pay for a bundle of trading executions and sell-side research in a mechanism called soft dollars. Soft dollars are no longer allowed at many funds, and investors increasingly frown on this opaque way of paying for what are now considered commodity trading services.
As a result, brokerages have had to find new ways to justify the cost of keeping analysts on staff, which is why Goldman Sachs (GS) started the practice of "huddling" with its best customers and giving them stock tips that are not shared with the entire customer base, according to the Wall Street Journal. Now that doesn't sound very fair, does it?
Investment banks that trade their own money have also instituted situations where their own proprietary traders, who essentially manage internal hedge funds for these banks, sit next to traders who are supposed to get the best deal for outside customers. How can this hurt retail investors? Among those outside customers are the retail brokerages that often group piecemeal retail trades into block orders. So if the large investment banks are watching these retail orders coming in and are able to trade in front of them -- a practice called front-running -- then the retail investor gets an inferior price for their trades.
Then there is the inexplicable inability of the Securities Exchange Commission to pursue investigations into any bank or financial institution of any real size. Since the inception of the credit crisis and the resulting collapse of three major financial institutions (including the bankruptcy of Lehman Bros.) , the SEC has yet to take any major enforcement action against any large investment bank. The SEC has an annual budget in excess of $900 million yet it routinely claims it does not have the money to pursue enforcement.
In light of the Bernie Madoff Case, where the SEC ignored red flag after red flag, and even stiff-armed a sophisticated investor who presented clear evidence of a pyramid scheme, it's now an open question whether the SEC is able to provide even a modicum of enforcement. Time Magazine even asked if Madoff investors could sue the SEC for failing to detect what in hindsight was an enormous elephant dancing in the corner offices of the agency. With no cop on duty, that means no penalty, and no reason for the bad guys to fear. No wonder, then, that the little guy has never had it worse on Wall Street.
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Reader Comments (Page 1 of 1)
9-14-2009 @ 1:28PM
Sonny said...
RIGGED..........That is the largest understatement I have ever seen in my life, and I am 60 years old. Anyone is absolutely insane to invest in anything connected to Wallstreet. Screw Wallstreet and all other financial institutions for that matter..........Do you trust them????
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9-14-2009 @ 1:47PM
Gary said...
So what am I suppose to do with my 401k? Over the long haul I still have a fair return even after the crash...no yacht yet though or jet or vacation home...guess its not so fat after all...lmao
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9-15-2009 @ 1:27PM
Maghreb said...
The writer (salkever) is "righter"
He is certainly more right than all the quasi friends (Motley Fools and others) who push small investors deeper into the dark, into equity of this or that company, start-up, corporation.
He is certainly more right to raise the hot geyser issue - who can bend the rocket tools hedge funds use to gain unfair advantage on us all. We are not necessarily after yachts. We simply want pensions that will make life easier when they should get harder, for we come of age.
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9-14-2009 @ 2:15PM
Kate said...
I saw how brokerage firms dumped inventory bought at lower prices, for higher prices onto it's customers in the 60's. Maybe they were good issues, maybe not, the firm still made money. I saw accounts being churned for commissions. I went to NYC to see first hand, and saw the commodity guys run gold and silver and copper up to buy prices, while shorting, then selling to enable them to profit on their shorts. Nobody left that place broke. Every major firm "front runs" the little guy, this should be illegal, but it isn't.
I could make millions if I could see the orders too. To preserve the capital markets ability to raise money, our government has tolerated this from the get go. It still goes on. Unless you have a great connection, or a lot of money that demands attention to your account, you had better have a lot of luck on your side or be able to outsmart the people on the street. Don't even imagine the regulators are going to help. If WS firms can't be a step ahead of the public, Wall Street can't make money, it's that simple. Of course, if you do your homework and go long term, 3 to 5 years, with companies with good revenues, good management, increasing earnings with good products, you might be fine too. Never take your eyes off your investments.
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9-14-2009 @ 2:23PM
RAY said...
WALLSTREET CONSISTS OF NOTHING BUT GREEDY SLIME
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9-14-2009 @ 2:26PM
RAY said...
JUST LIKE THE U S GOVERNMENT
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9-14-2009 @ 2:36PM
Davey Rockyfeller said...
First off they know the secret of trading technically and then they create movement to make money up and down. Second the executive class passes out options to each other and regulary cash them in fleecing the little people after paying NOTHING for these. Then at the top you have the banksters who create money from thin air but charge everyone else outrageous interest while producing nothing and controlling everything. By controlling ALL the money, credit, interest rates etc. they control business, government, the meida, foreign policy, and make sure it stays that way. the only way a small investor can beat them a little is to study on their own, understand technical trading, study how money works and how it trades, study companies balance sheets and make sure they get paid cash dividends. Analyse currencies like stocks and go with the profitable ones which in this case is NOT the US dollar. It's now David Rockefeller's global economy and our government is a paid off front so you have to invest globally in the strongest currencies and businesses and commodities. Gold and silver have been real money for thousands of years so put some of your money into them on the dips too. Use trends with stops up and down and be patient buying at a good price.
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9-15-2009 @ 11:14PM
glenn said...
David Rockefeller's global economy? How about the Zionist Federal Reserve System. We (our country) do not create our own money. Therefore the interest we pay on our National Debt, is paid to the Zionists World Bank whom prints all of our near worthless Monopoly money. Interest paid simply for running the Press's? That doesn't seem fair, but remember the Zionists are descendants of the Sanhedrin scheme, so it's O. K. to screw the Goy's. Hey recently some Rabbi's were arrested in New Jersey for trafficking in human body organs taken from the dead Palestinians that were recently killed . Nice human beings.
9-14-2009 @ 3:44PM
Jerry said...
Oh, yeah, its a terrible environment. I invested in the market in mid March, and now I'm up 60%. I've made a fortune. I can retire with the profits I've made in 6 mnoths, and I'm a sole individual, a non pro.
You Daily Finance writers are morons. So are most of the posters here. Kiss my rich ass, idiots. Rot in your market paranoia.
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9-14-2009 @ 4:08PM
Iridium said...
The stock market was never intended to be to be a place where you get rich in six months. The point of stock was buy and hold.
Take your profit right now and be happy. If you leave your money in the market you will be out 100% in the next collapse. We are running on a 3-5 year boom collapse cycle now. Institutional traders are dumping shares right now which signals a collapse. Take your profit, it isn't justified by any law of economics but you made fake money so take it.
Wall Street has been corrupted into a system of fast profit off the transfer of money from the small investor to the corporate giant.
It is very simple to see the market now. The institutions collapse the market to bring down share prices after they sell off their stake. They then buy huge amounts of stock at collapsed levels which in turn drives the market up wildly. The media owned by big financial then reports that the economy is in an upswing and you get all the stories of individual investors getting left behind. That they are stupid not to get in the market.
The little guy doesn't care that a company is trading at 50 times earnings. He has been taught that Wall Street makes millionaires overnight. HE WANTS IN. That big firm is all to happy to sell you shares at a 300% premium from what they bought it at. Once their shares are gone they collapse the system and are all to happy to buy those shares back from you and profit again.
The system is completely rigged. Because Wall Street does not produce anything of value it needs market collapses in order to create profit opportunity. THAT IS THE GOAL OF GOLDMAN SACHS. To create profit opportunity through the rise and fall of the market. Not the individual performance of stocks.
Stock prices have been so distorted from their real value that the entire purpose of issuing stock has been completely forgotten. No company is ever worth 40-50 times the value of its shares.
9-14-2009 @ 11:47PM
ij70 said...
Good for you. Ever hear this thing called inflation?
9-14-2009 @ 4:16PM
sgentilejr said...
The stock markets have always been rigged. Evey time a stock in the DOW is performing poorly it is removed from the DOW and replaced by another company that is going great. By doing that time and again, decade after decade they have manipulated the numbers time and time again being reported for the (DOW) Dow Jones Industrial Averages to make investing in stocks look like a far better investment than it really is. The same Bait and Switch practice constantly takes place for the other exchanges and their industrial averages also. The whole game is fixed to get suckers to relinquish their money to those Snake Oil Salesmen on Wall Street.
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9-15-2009 @ 2:26AM
day trading system said...
I don't think its worse for small investor. Its the way how you invest.
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9-15-2009 @ 8:41AM
eeyyy said...
its soooooo f**king obvious,,liars ,theives,,absolute scum sucking rats!! all wall street ever was is a group of well dressed rip-off artrists.they calld me everyweek,when i told them i had 300k to invest,,of course i didnt!,,offering me everything under the sun,,,cocksucking son of a bitches,,,,lol,lol i would never do a stock deal ,,ever,,i still buy real estate,,a 10k home in paduka,,will rent for 400 a month,,anywhere,,after 3 yrs,,im even,,and then it pure profit,,and they have an inexpensive roof over they're head,,a win win,,,,,,f-u wall street,,f-u big government[sec will be sued!,,worthless bastards] bernie madoff is a scapegoat,,a diversion from reality,,,note: if wall street calls,,hang up!
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9-15-2009 @ 8:45AM
timothy said...
You can tell by the hate and bitterness who the losers are on this subject. The market has started a bull market in March. Nobody rang a bell but I was fortunate enuff to get a few hundred $ into an S&P mutual fund in Feb-May. Results have been great 20% return...we might be at the start of a 3 year bull market...still buying !!!!!!!
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