The short answer, unfortunately, is yes. But the market is not rigged in the way most people think. Believe it or not, the vast majority of market professionals do play by the rules. The reason for this is simple: if a broker or a bank or an investment manager gets caught breaking the rules of fair trade, the cost in terms of fines, penalties, and damage to reputation would be far worse than any extra profit to be gained. The manipulation that exists in the market is of a different kind. It has to do with the selective distribution of information on a “pay-to-play” basis, which means that the investors who have the biggest accounts get access to information that regular investors never see. Let’s first take a look at the definition of manipulation as it relates to the stock market.
Market manipulation describes a deliberate attempt to interfere with the free and fair operation of a market, and create artificial, false, or misleading appearances with respect to the price of, or market for, a security. Market manipulation is prohibited under Section 9(a)(2)[2] of the Securities Exchange Act of 1934.
Some examples of activities that would be considered market manipulation:
Pools. Agreements, often written, among a group of traders to delegate authority to a single manager to trade in a specific security, for a specific period of time, and then to share in the resulting profits or losses.
Runs. When a group of traders create activity or rumors in order to drive up the price of a security. While the price is artificially inflated, the traders sell their shares to unsuspecting buyers.
Ramping. Actions designed to artificially raise the market price of a security and give the impression of voluminous trading, in order to make a quick profit.
Churning. Placing both buy and sell orders in a security at approximately the same price, in order to create the appearance of increased activity, which in turn attracts more interest from legitimate parties.
Bear Raid. Attempting to push the price of a security down by creating and spreading false rumors, while selling short excessively.
It’s certainly true that these practices take place in the market, but the extent of the damage caused by them is minor in comparison to the damage caused by the systematic, uneven, and unfair distribution of information to investors. So how can an average investor, with an average account size (currently estimated at $27,000 by The Investment Company Institute), get access to the type of “insider information” that the big boys see? Well, you could be lucky and happen to have a brother-in-law who manages investments for High Net Worth clients. (But then you’d also have to convince him to share his carefully guarded secrets with you.) Other than that, there is simply no way for you to compete against big money investors who have much better information than you, and they hear the information hours, days, even weeks before it’s announced in the press.
I spent 30 years as an advisor to wealthy families and institutions, and I know how the game is played from the perspective of an insider. When I retired in 2005, I started ZenInvestor as a way to give this information to average investors at a reasonable price. Some of the information is free, and you’ll find it hiding in plain sight if you take a little time to browse the website. For those of you who want to dig a little deeper, and are willing to do a little homework, our Premium membership reveals even more of the secrets of wealthy investors. And for the most detailed and intense investment training available anywhere, we offer Advanced Coaching, which is a customized, one-to-one training program designed for the serious investor.