Liar’s Markets (Part 2)

Is the stock market rigged?

In some ways, yes. There will always be people with more information. There will always be people with faster data lines. There will always be people who can react quicker. That doesn’t mean the market is rigged. It means that it’s a market.

Economists like to talk about asymmetric information. That’s when two parties negotiate a price, but one of them knows more than the other. Used cars are a great example. The owner of the car knows how it’s been driven, how it’s been maintained, and what issues it currently has. The buyer just sees/hears/test-drives the car.

It’s like that in the market. Investors know what they want to buy or sell—dealers have inventory and knowledge of what other dealers and investors may own. In the old days—pre-2002, when the bond market was voice-to-voice—large investors had to be very careful what they said. Sometimes word of a pending trade could leak out and the price would move before the trade got done. Trading is like a poker game, especially for large players. It’s highly competitive. But over time, increased competition has reduced the spread between buying and selling from 25 cents per share to a penny or two. It has actually helped the “little guy.”

It’s hard to make money trading. Transaction costs and the bid/ask spread work against it. It’s a lot easier to make money waiting. That’s not a rigged game. It’s investing.

Douglas R. Tengdin, CFA

Chief Investment Officer

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