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

By | 2014-04-02T09:35:45+00:00 April 2nd, 2014|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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