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Is the Stock Market Rigged? Are the Markets Rigged?

Are the Markets Rigged?
Written by Andy

Newbie trader Omar Ghias made over $1.5 million as stocks as stocks soared during the early part of the Covid crisis. The speculative mania was high then. As his gains increased sharply he started spending more on everything from sports betting to bars and luxury cars. He even borrowed money to leverage his positions. When the party ended most of his fortune dwindled thanks to so some wrong calls and his excessive spending habits. To make a living he now works at adeli in Las Vegas that pays him roughly $14 an hour plus tips and sells area timeshares. He says he no longer has any money invested in the stock market. “I’m starting from zero,” said Mr. Ghias, who is 25. “I really started treating the market like a casino,” Mr. Ghias said.”

Every trading style has its time in the sun. Bull markets bring out the day traders and speculators. Young people often believe that investing and trading are easy, especially when they get started, when the escalator is going up. It’s hard to make a bad move because almost everything is rising. That is, until it isn’t.

Is the stock market rigged? The market is rigged in some ways that are illegal, some that are legal, and some ways that are borderline. The legal stuff is just what you know going in, such as about the bid/ask spread. The borderline stuff is what you read about in flash boys, where the high frequency traders will jump in front of your order when they see it coming

The game is rigged in favor of the house (those with inside information and the ability to temporarily move the market in ways that enriches them), the valuations are divorced from actual real-world data, and the psychology of investors whipsaws the market rather than the reality of the individual corporation’s bottom line. The truly nasty stuff you see when you observe what happens when lots of money is on the line. The Maximum Pain Theory states that with high probability the price of a stock will end up at a place to cause the maximum pain to holders of options that are going to expire soon.

What happened to Carvana Inc and GSX (a chinese education stock that has now changed its name to Gaotu Techedu) stocks in 2001 when both stocks used to keep going up without as much as a pause for extended periods of time is proof for me that stock prices can be easily manipulated. GSX stock was basically a chinese stock that was heavily manipulated then by a hedge fund (Archegos’ Bill Hwang) and he used to basically squeeze shorters for his gains. Carvana Inc was a second-hand car company where the insiders enriched themselves (by selling stock) at the expense of all other holders. When the Carvana insiders were selling stock in droves every single day the stock price kept holding and actually moving up. What can that be if not manipulation?

The fact that some people win does not prove the market is rational or objectively predictable, it merely proves the law of large numbers, in the same way that a winning PowerBall ticket doesn’t prove the wisdom of participation in the lottery or the buyer.

The problem? It’s ALL a casino, and you don’t have much choice. Real estate. Crypto. Stocks. Bonds. Collectibles. Metals. The reason that risk assets have higher potential performance is because they are not “rational or predictable.” Investors demand higher potential returns because of the unpredictability.

You have to put your money somewhere, and none of them are rational or predictable. Perhaps the only way to approach the entire rotted edifice is to buy and hold index funds, but it is all a roll of the dice. You pay your money and you take your chances.

Back in the 90’s, when I was new to securities investing, I made some bad moves but never stopped studying the market. The toughest part of investing for an impatient person, is understanding that patience is essential. You also need to operate with stop loss orders. If you are lucky enough to have a stock go up 40%, then set a stop loss order at 30% and take your profits and run. One thing I have learned in the market, when a stock goes up quickly in value, ignoring the fundamentals, then its going to come back down as quickly.

The Gamestop learning experience taught a whole group of young investors about gamma squeezes and short squeeze tactics. They are using it against large hedge funds just like those hedge funds use the data they see on average investor positions to place bets against them. The problem is the hedge funds have huge amount of money to move the algorithms trading the market, the retail investor is not allowed to have a cooperative to do the same. The money will continue to be sucked away from retail investors until they A) petition the government for a change, or B) run out of cash and give up. What is happening is not healthy but our SEC chairman thinks it is just fine.

A pandemic boom attracted scores of Americans seeking gains. Now that some are backing away, the markets risk losing a key support.

The support that the market is at risk of losing is the one crucial thing that it can’t operate without: Chumps

Without a steady chump supply, there’s no market growth. Try waving some shiny things around and make up some nonsense terms that sound like the financial versions of the science terms they use on Star Trek. Something, like “asymmetrical pre-monetization” or “value-flooded margin ratings” . That slight of hand trick usually brings the chumps running in to empty their wallets, because chumps would rather lose their money than admit that they don’t understand what you’re talking about.

It’s the losers that allow the winners to make money. Capitalism requires people at the bottom of the pyramid so those at the top can bask in their wealth. The more losers there are in the market the better it is for the sharks. That’s why most traders lose money. Stocks may not be a zero-sum game but sometimes it very much feels like it is!

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