Is The Stock Market Really Rigged?

There is a new book by Michael Lewis called “Flash Boys” which has many people talking and wondering if they should be concerned with investing in the stock market. During his public relations blitz, he summarized his book with the following stunning phrase – “the stock market is rigged”. My fear is that potential investors will use this as an excuse not to invest for their future which requires investors to be exposed to the stock market. So let’s examine his conclusion.

carsIn interviews promoting the book, the analogy Michael has used to highlight how the stock market is rigged is the following. You want to go to a popular ballgame. You decide to buy 4 tickets on a website for the advertised price of $20 per ticket.

However, when you put in the request to buy the 4 tickets, only 2 tickets are available at $20 and the other 2 tickets are now selling for $22. While this would be disheartening, it hardly rises to the point of calling the U.S. stock market “rigged”. At best, there are some who are skimming money on the transaction to enter and exit investments in the stock market. 

However, to continue with his analogy, just because there are those who are taking advantage of your desire to purchase specific tickets to the game, does not mean the game itself is rigged. At best, the process of buying the tickets may be less than ideal.

This is a far cry from the charge that the stock market is rigged, as Michael has alleged in his book.

As new technologies are added into the marketplace, you will always have people who try to take advantage of the speed of information generated by technology. The issue highlighted in his book affects parties that are primarily executing trades, in specific securities, within short units of time commonly associated with day traders and active stock pickers. However, this is not a concern for our clients.

Our investment partner – Dimensional Fund Advisors (DFA) – has a distinct approach to investing which is designed to protect their clients from being exposed to unnecessary costs. DFA has a standing policy that generally does not require their traders to execute every share of an order candidate. Traders have, and frequently use, the option to reach the end of the trading session with orders that are partially filled or not filled at all. This flexibility allows them to reduce trading costs and avoid paying additional amounts for the trade.

In addition, DFA allows their traders real-time flexibility to be patient and opportunistic in executing a potential stock order from portfolio managers. The traders are rarely ever required to trade any given stock due to the investment strategy employed for their portfolios. DFA also regularly reviews their trading costs and adjusts their trading methods as markets have evolved.

An analogy of this flexibility and patience can be seen in the following. If you walk into a car dealer and you know specifically what model car you would like, what options the car must have and the necessary color, the car dealer will be able to charge an additional premium as you have no substitute. If, on the other hand, you are willing to take a similar car, one with different options or a car in any color, your flexibility provides an opportunity to avoid the premium increase. This is how DFA operates in running their stock portfolios.

Investors have to concentrate on why they are purchasing stocks in the first place. Generally, the reason is to ensure that their assets outlive them which will provide the lifestyle income for, what will likely be, a long retirement. Implementing an investment portfolio strategy that does not require regular trading will also help you avoid being skimmed.

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About Dan Crimmins

Dan Crimmins, co-founder of Crimmins Wealth Management, is a financial coach and fee only financial planner. Have a financial question? ASK DAN

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