Why Michael Lewis Is Both Right and Wrong to Say, “The Stock Market is Rigged”

Author Michael Lewis recently said "the stock market is rigged," and while the troubles he proclaims are scary, he's missing one reality.

Apr 5, 2014 at 1:00PM


Recent news has led many to believe the stock market cannot and should not be trusted. But such a belief is both correct and incorrect at the same time.

The terrifying reality
This week, acclaimed author Michael Lewis was featured on 60 Minutes discussing his newest book "Flash Boys." The book dives into the dark world of stock trading, and the various schemes and inefficiencies which guide it.

In short, certain firms like Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS) and countless others have realized the speed at which trades are executed at stock exchanges like the New York Stock Exchange and NASDAQ OMX Group (NASDAQ:NDAQ) is of immense importance. Being able to execute a trade microseconds faster resulted in a firm being able to bid up the price of a stock someone else was trying to buy perhaps just by a few pennies.

By Thetaxhaven

Source: Flickr / thetaxhaven.

While pennies don't sound like a lot, with the volume of trading which goes on in the market, Lewis estimated that this "tax rate" of less than 0.1 percent resulted in nearly $160 million a day being skimmed from the top.

The book profiles Brad Katsuyama, a former trader who discovered this issue and who started an exchange called Investors Exchange which seeks to eliminate the problem.

But Katsuyama, Lewis and others weren't the only one to notice the problems here.

Eric Schneiderman, the New York Attorney General had pledged to investigate and crack-down on high-frequency traders. Regulators including the SEC and CFTC have joined in the probes of the underlying operations. Just this week the Wall Street Journal reported the FBI too would begin investigation into high frequency trading. 

All of this has led Lewis to assert:

"The stock market's rigged. The United States stock market, the most iconic market in global capitalism, is rigged."

He went on to say as a result the victims were "everyone who has an investment in the stock market."

The missing piece
Lewis is absolutely right to denounce the deplorable practices which seemingly scheme billions from the pockets of investors, but the problem is the reality he is missing on critical element, which is the difference between trading and investing.

It should come as no surprise those who engage in trading are facing an incredulous battle to earn money. Four professors found "more than eight out of ten day traders lose money," in a six month period. The Securities and Exchange Commission says simply "Day Trading: Your Dollars at Risk," and goes on to suggest the following are facts surrounding it: 

  • Be prepared to suffer severe financial losses
  • Day traders do not "invest"
  • Day trading is an extremely stressful and expensive full-time job

Blame undeniably lies heavily on the shoulders of the firms under investigation as Lewis outlines, but ultimately trading is a dangerous journey even without the seedy practices which guide it.

By Hannes Ambrosch

Source: Flickr / Hannes Ambrosch.

The correct view
Investing, on the other hand, is approached with an understanding the dollars put into companies through their stock is buying a tangible piece of a company, and sharing in its success and failures. These are not decisions which should be changed daily based on simple movements in prices, but instead those which are guided either by personal diligent research or recommendations from those who can be trusted.

And if neither of those apply, Warren Buffett, one of the greatest investors of all time, recommends a strategy of saving money for retirement through a simple low-cost index fund which mimics the S&P 500. Simple habits of saving and trusting in the market will result in remarkable returns.

If a stock is bought with the intention of holding it for decades or -- at the very least -- years, paying less than 0.1% more will be frustrating, but it should by no means serve a deterrent. In the grand scheme, that amount is immaterial over a lifetime.

In the end, Lewis is right to say trading is "rigged." But investing is not.

The greatest thing Warren Buffett ever said
Warren Buffett is perhaps the greatest example of one who understands the difference between trading and investing. You see, he has made billions through his investing, but he's not afraid to share what he's learned, as he wants you to be able to invest like him. Through the years, Buffett has offered up countless free investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.

Patrick Morris has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers