Friday, July 2, 1999

The Market Is Rigged

by OfTheBear

On June 3, the Fribble wondered aloud if the market was rigged by organized crime. The question might be whether you even have to use that much imagination or even look that far. Traditional efficient market theory makes assumptions about the flow of information. Does anyone believe that information flow is actually perfect or that individuals have the same information available to them that institutional investors do? Where is the balance between individual and institutional investing?

There are some questions that indicate, perhaps, "disorganized crimes":

  • How is it that your average "Internet IPO" debuts at around $15/share, but the first day of trading takes it to $30-$60/share? Are the makers really that poor at estimating value?

  • After closing a few days ago, American Home Products (NYSE: AHP) announced some adverse news. Yet, a couple of hours before closing, it dropped dramatically. How many institutions received "rainy day calls" on AHP?

  • Behold the market power of significant Wise analysts. How often has the latest proclamation resulted in a drop or a surge? Do institutional investors rely on sound bites to manage portfolios? Does this create opportunity or carnage for Foolish investors? Does it matter in the long run?

  • After hours trading -- does more have to be said here?

The truth of the matter is that any position in the market is affected by every other position in the market. Is there a "level playing field"? Of course there isn't. Does it cost you money? Absolutely. How much money? Dunno, but I've got a great tip on where Al Capone's second vault is...

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