There Is No Level Playing Field

by Lee Distad

Field

In recent weeks, the business media has been host to a rising tide of faux-outrage at perceived injustices in the financial marketplace.

A lot of column-inches have been devoted to High Frequency Trading and, more recently, a tempest in a teapot has been brewing over bond-flipping by originators and institutional investors.

Arguments like these are far from new. But it’s worth noting that all of this hand-wringing by financial pundits is, of course, predicated on the notion that somehow the marketplace, and life for that matter, is supposed to be fair.

But it’s not.

Do You Have the Best Information?

There are a numbers of reasons why it’s not fair, not the least of which is the asymmetric distribution of information.

Markets function when there are both sellers and buyers. Sellers sell because they believe they have a reason to sell, and buyers buy because they believe they have a reason to buy.

Often that belief is based on their evaluation of the information that they have. If they didn’t think that selling or buying was the right thing to do, they wouldn’t do it.

Who’s right: the buyer or the seller? There’s no simple answer. After all, there’s an old saying that “there’s a sucker on at least one side of every trade.”

Instead, consider that no matter what you think you know, someone else probably has better, more accurate information. Business news television might as well be the History Channel. By the time you see it on TV, the markets will have already moved.

Beyond just information about what’s happening in the world of business, information about market prices is extremely asymmetric.

Small investors and traders need to face the fact that unless they’re paying a premium price, their access to market prices is several long minutes behind what institutional trading desks see.

Know that There Will Always Be Inequities

This brings us to the media hoopla over High Frequency Trading: scalping fractions between every trade is what market makers do. It’s nothing new, and has been going on since the beginning. For that matter, bond flipping, and even IPO offerings, have never been “fair.”

Beyond their fees, this is how underwriters make the real money on these offerings. Being angry about it isn’t going to change anything, but being aware that it goes on will help you make better-informed decisions, such as not buying an IPO at the top when it has popped sharply upward.

I’m fond of saying that life is not fair, it’s just sometimes unfair to your advantage. Focus on what you really have control over, which is your personal investment strategy.

Railing against the injustices of the world won’t necessarily help you achieve your financial goals.

Lee Distad consults with CE integration firms on design, installation and project management processes and Best Practices, and offers provides professional copy writing services for websites, brochures, and marketing initiatives. His freelance work covers topics from CE to global business to finance in both print and online.

{ 0 comments… add one now }

Leave a Comment

{ 2 trackbacks }

Previous post:

Next post: