I see a lot of comments about how the "little guy" feels like the system is stacked against him. Who are we talking about here? The small investor? Au Contraire: There has never been a better time in history to be a small investor in the United States. Note - there is a difference between investors and traders, which I'll get to in a minute.
-We've had a veritable FLOOD of new ETFs created, which allow investors to easily and with granularity select exactly what kind of exposures they want. Small retail investors can now get customized exposure to almost every sector and industry, as well as fixed income strategies, developed markets, emerging markets, international indices, commodities and even currencies.
- Technology has allowed brokerage firms to provide speedier access and cheaper commissions. One can now trade for $9.99 or less, and customize executions to decide which exchange to send orders to, as well as use advanced tools for research, charting, and rapid market access via front ends (I use Etrade's Power Etrade, personally, and it's decent).
- Bid/ask spreads have decreased from quarters 10 years ago to pennies today. That's a good thing - no matter how you slice it.
- Individuals can easily get access to after hours trading sessions, should they so desire.
- Access to information: the individual investor has ample access to an insane amount of information: SEC filings, news, research reports, rumors. When I first got interested in stocks as a mere pup of about 15 years old (and this is less than twenty years ago), I would read the earnings reports in IBD looking for companies with increasing earnings. Then, I'd call my broker, speak to an actual person, and get the phone numbers for the companies I was interested. THEN, I'd call the companies themselves and ask them to send me their latest annual reports, 10k, 10q, and if I was lucky, I could begin doing some analysis a week later!
In my opinion, the most important items for an investor are selection of products, availability of information, ease of access, and costs of trading. I don't know how anyone could argue that we're at unprecedented "bests" in all four of those categories.
Now, how about the small "trader?" Well - that's a different story, and it should be. Our markets aren't constructed (nor should they be) so that any monkey sitting at home can turn on a computer and print money by easily navigating our capital markets. If you want to trade with the big boys, who are faster than you, smarter than you, more experienced than you, and have more technology than you, you're going to lose. The important thing is that this "big boys" club isn't an exclusive club - anyone with the resources can develop their own trading systems and gain equal access to the same "privileges."
So if you're a small trader and you're disillusioned with the markets and are throwing in the towel - good for you! That's your prerogative - no one said trading was easy - but I don't think anyone needs to weep for you. No one has the right to demand to be able to make profits trading their personal account! Take a longer term view, do some real research, and invest in companies at prices which you like. If you're right, you'll make money in the long run. THAT is the important feature of our markets. (If you want to talk about how markets are rigged, I think they are actually rigged in one way: against the prudent short positions. Markets are rigged to go higher. We need them to - our society's spending habits depend on it, because we have come to think of the value of our portfolios as synonymous with our wealth. If you're positioning yourself from the short side, you may also eventually be proven right, but you frequently have to endure a lot more pain in the process)
The most important point, though, is that all of this fancy trading stuff doesn't hurt the little average Joe Investor! It doesn't hurt you when someone or some electronic thing crushes your beloved ACN down to a penny and then it rebounds in a matter of seconds. Other people's mistakes are YOUR opportunities. If you're really the investor you claim to be, you don't care about short term price movements, and need not lose faith in markets because of the short term aberrations. Of course, I already wrote a whole post about this: don't lose faith in markets, lose faith in market orders.
Everyone, investors and traders alike, should certainly understand one important thing, though: The Market doesn't owe you any price for your stock. If you use a market order, you are saying "I want to be filled, regardless of the price, even if the price on my sell order is 1c." Now, I'm guessing that people don't really mean that. Ever. I've said it before, and I"ll say it again: in my opinion, you should NEVER use a market order.
Liquidity is not a right, and should not be assumed. Expecting it to be there is a mistake. Liquidity gaps have happened throughout the history of trading markets, and they will continue to happen.
John Hussman provided some great old quotes in his most recent piece
"Of all the mysteries of the stock exchange there is none so impenetrable as why there should be a buyer for everyone who seeks to sell. October 24, 1929 showed that what is mysterious is not inevitable. Often there were no buyers, and only after wide vertical declines could anyone be induced to bid ... Repeatedly and in many issues there was a plethora of selling orders and no buyers at all. The stock of White Sewing Machine Company, which had reached a high of 48 in the months preceding, had closed at 11 on the night before. During the day someone had the happy idea of entering a bid for a block of stock at a dollar a share. In the absence of any other bid he got it."
John Kenneth Galbraith, 1955, The Great Crash
Hussman, in his own words:"If you spend a good portion of your time studying price-volume behavior, "air pockets" of the type we observed last week become familiar parts of the landscape (though they are typically not so distilled into a single intra-day move). Robust demand is the only thing that holds prices from falling vertically in the face of eager selling. Overvalued, overbought, overbullish markets are often already spent of that demand. As investors suddenly became aware of that reality on Thursday, all I could think was "welcome to my world.""
I've grown fond of another expression I coined, which I think accurately describes the market action of last Thursday, May 6th: Markets aren't efficient, but they are efficient enough! Was is crazy that ACN and other stocks traded down to 1c? Of course it was, and we will probably modify our market structure to try to prevent it from happening again - but note this: the aberration was quickly corrected by The Market, and the lasting damage for the small individual INVESTOR was nil. In fact, it was an opportunity to pick up some stock at fire sale prices!
There's no need to weep for the Joe SixPack American Retail Investor. There has never been a better or more rewarding time for individual investors who do their homework to be able to quickly, cheaply and easily invest in the companies they choose to.