Tuesday, 20 March 2012

Wall Street Rigged

For a long time now, I have pointed out that the sports investing markets are much fairer and open to the majority of us than the financial markets. I’m excluding sports involving animals with four legs, and individual sports can be dodgy with players retiring, but when it comes to team sports in competitive leagues playing matches that are important to both teams, you can have a high level of confidence that the game is being played honestly. Sure, those close to teams with knowledge of injuries or line-ups have an edge, and this can be huge in a sport such as basketball where the absence of a star player will make a huge difference to the price, but if you bet pre-game, this is a risk you take, and it can work in your favour as well as against.

But I digress. Here is a story from the Yahoo! Finance pages that highlights how the game is rigged in favour of insiders.
The U.S. Labor Department's monthly employment report is one of the most-anticipated market-moving data points watched by investors and traders on Wall Street.

But ahead of Friday's February jobs data, CNBC reports that the Labor Department and other government agencies are concerned some traders are illegally accessing data ahead of its official release while others are jamming agencies' websites to give only a handful of people access to information, slowing it down for everyone else.

In an effort to prevent potential future data breaches, the Labor Department has asked the company responsible for securing the nation's nuclear stockpile to analyze its security protocols. The U.S. Energy Information Administration is also targeting and blocking certain computer IP addresses that seem to show "malicious intent," according to CNBC reporting.

Jane Callen, a spokeswoman in the Office of Economic Affairs at the Department of Commerce, told CNBC the cat-and-mouse game has been around for a long time. "And at each turn, the government is going to make sure they're doing their best to ensure the right protections are in place," she says

News of this brings us here at The Daily Ticker to ask again the age-old question: Are financial markets rigged against the individual investor?

"Absolutely," says Lance Roberts, CEO of Streettalk Advisors. "If you're trying to look at the economic data that is coming out and you're hitting refresh on your Internet browser you are so far behind Wall Street you'll never catch up."

But the information lag time is not the only problem facing individual investors.

High frequency trading also puts the little guy at a disadvantage. Traders who profit from this type of investing use powerful computers to react to market movements and patterns before any human possibly could. Along these same lines, major investing firms have moved their trading systems as close as possible to Wall Street to shave nanoseconds off the transaction time.

"The average investor really is at a disadvantage these days," says Roberts.

Then there's insider trading by members of Congress. Even our very own elected officials are using inside government information to profit at the expense of everyone else. The public outcry to ban this behavior, which has been going on for years, finally came to light after a CBS "60 Minutes" report last fall. Since then, a bill to prevent congressional insider trading has moved quickly through both the House and Senate, but likely still does not go far enough to make any real difference.

"The average American is starting to kind of be fed up with the way things are, the status quo," says Roberts. "The best that the average investor can do is play along with the game."

By that, he means old strategies like buy and hold, do not necessary hold up in today's market.

"Understand that buying something and trying to hold it for three years or four years or five years and getting long-term capital appreciation might work for you, but it probably won't because everybody else on Wall Street is trading all around you," he says. For example, while fundamentals of a company may look good, there may be a breaking news event that tanks a stock. Take Netflix.

"Fundamentals still work and fundamentals determine what you buy, but you need to add a technical analysis to your [portfolio] management," he says. "Timing and trends are going to be much more important in the short-term. The goal here is that long-term we can make money, but we have to avoid those short-term declines."
I’m not sure I agree with the suggestion that “old strategies like buy and hold, do not necessary hold up in today's market” – it seems to me that these are exactly the strategies that outsiders like myself should be employing. As outsiders, not playing the rigged game means not trying to time our entries and exits, and forgetting about looking for short-term gains. The stock exchange doesn't have a delay built in to protect those with delayed data. By investing for the long-term in index tracking funds, and holding the positions, we can at least expect to match the markets, and historically, you can do a lot worse with your money than that.

Meanwhile, as predicted, no details yet from BigAl on his ground-breaking mathematical proof that the statement “if you can’t show a profit to level stakes you don’t have an edge” is false, as he asserted. Reminiscent of the supposed ‘Holy Grail’ claim from Slicer, which had people coming together in work groups and wasting countless hours searching for the non-existent, this claim from BigAl is similarly deceptive. I’m not sure whether the claim is meant to convince others or himself, but either way, it is wrong. A simple example to clarify things - if you play Roulette on a single-zero wheel where the payout on an individual number is 37-1 you have an edge, and will show a profit long-term to level stakes. If the payout is the industry standard 35-1, you don’t have an edge, at least not a positive one, and you will show a loss long-term to level stakes. There are web sites that allow you to see this in practice for yourself.

And finally, Average Guy, who recently acknowledged
"I am one of theses bloggers, and sadly I am well aware how correct Cassini is"
"Whoops, Cassini was right, selective memory, Over €95 loss, and it was 3:00 am, mea culpa"
Regarding 500-5000, don't pick on those less fortunate than you, after all the likes of him are probably paying for your little vacation. What really surprises me is the fact that his comments provoke you so much, are you a sensitive man ?
I think my track record of almost four years on here answers that last question. As for his comments being provocative, I have no control over what others write, and how they try to provoke me - all I can do is control my response to the provocation, and I do that, not in a negative way, but in a controlled, considered, respectful and polite way. Usually. Many comments do provide something to write about, and as regular readers know, comments are a rich source for many of my posts. In this specific instance, Mr. 500's post was misleading, and I wrote a generic post on the topic of how gamblers have a tendency to be selective in their recall of facts, using that post as an example. I clearly stated that my post was not intended to pick on Mr. 500 - he was merely the catalyst for the day's post. That would normally be the end of it, but when he then followed up by stating falsely that he was in profit for 2012, I quite politely pointed out to him using his own words from his own blog, that this wasn't exactly true, and at the same time, the fact that his loud protests confirmed my initial point was just a bonus.

You might also note that I completely ignored the rather rude part of his comment, (he's young, so a little immaturity is to be expected), and his blog is still present on the blog roll. Sensitive, I am not.

As for 500, how he reacts to my comments is up to him. I call it as I see it, and if he wants to take the advice on board and improve his trading and betting, he can. If he wants to blame the messenger, and carry on losing, that's fine too, it's a free world. He is not 'less fortunate' than me - he is a lot younger though, and has much to learn. Whether or not he chooses to take advice is completely up to him.

This blog is sometimes controversial, it has been referred to as the Marmite blog, but I hope it is seldom boring. The hit count continues to exceed 500 on days when there is a fresh post, so I must be doing something right.


BigAl said...

Obviously roulette can't be beaten, thanks for pointing that out. I'm not sure of the relevance of using an example consisting of one negative EV play being repeated over and over.

Let's remind ourselves what the issue here is.

You claim "If a system cannot show profit at level stakes over an extended period of time, then no alternate staking plan in the long term, can produce a profit either."

I don't see any proviso stating you're betting on the same event at the same price over and over again as in your roulette example.

Let's talk sports betting:

Let's take an example of a proven long-term level-stakes-betting winning sports gambler who only bets when he believes he has EXACTLY 10% value

What would you expect his ROI to be?

10%? Greater than 10%? Or less than 10%?

500-5000 said...

Just to clarify things, in case they weren't clear enough, I am not in profit in 2012. That will be the end of it. I won't be commenting on my profit and loss again, and it has been updated as so on my blog.

AL said...

i would go further regarding the financial markets.

those people who are trading the news are not investors as Yahoo states, they are speculators. I would argue they are 2 very different things.

Investing is a long term activity and you invest based on long term fundamentals and trends and would not make a long term investing decision on whether the monthly BLS figure was up or down by a few thousand.

Average Guy said...

Damn right you are doing something right, best blog out there in my really important opinion. I'm just amazed that someone as knowledgeable as you appear to be, pays so much heed to the young and the restless.

TPI said...

Erm...a bit embarrassing, this.

As someone who is only too happy to accept constructive criticism (ahem), is there any chance that the Rt. Hon. Gentleman might update his blog roll?

You see, after many requests (four!), I've taken A Punter's Year back home to The Portfolio Investor (www.theportfolioinvestor.blogspot.com).

Once there, please do feel free to criticise to your heart's content. It'll be worth it you see, as criticism would be a small price to pay for the many more readers that you'd be sending my way. From that will come more comments, and from that will be a constant source of subject material on which to blog.

You know it makes sense... :)