Is the Stock Market Rigged?

The head of the Securities and Exchange Commission was on Capitol Hill last week to calm the outrage over a new financial scam.
“The markets are not rigged,” said SEC Commission Chair Mary Jo White.
She went on to assure the House Financial Services Committee that “The U.S. markets are the strongest and most reliable in the world.”
I agree with White that the U.S. financial markets are the best in the world. The American economy and liquid financial markets make the U.S. the premier place to invest. And the long-term record proves that the stock market is the best place to build wealth.
But given the size of the U.S. financial markets, this is a ripe opportunity for financial scammers. Some of these recent frauds include insider trading at hedge funds, credit default swaps, mortgage fraud, and money laundering by big banks. The list goes on and on…
The SEC and Attorney General have successful prosecuted several of the financial predators involved in these frauds. And I applaud their attempts to make the stock markets fair.
But when it comes to the latest and greatest scam of all, White and the SEC appear to be turning a blind eye.

So, is the Stock Market Rigged?

I’m talking about high frequency trading – a fraud that siphons $20 billion a year out of investors’ accounts. This scam lines the pockets of big Wall Street banks and trading firms…while reducing the returns for every investor.
It’s easy to see that high frequency trading adds little “value” to the stock market. Defenders of this activity claim that it provides liquidity to the market.
However, stock market volume alone isn’t a real measure of liquidity. If additional trading activity is done to undermine the transactions of investors, it’s a burden on the entire financial system.
Why does the nation’s top securities watchdog ignore such rampant fraud?
The answer is simple. This fraud is being overlooked because it costs every investor a very small amount of money each year. If the high frequency traders skim one penny off of every share traded,  the average investor might lose $100 or $200 per year. That’s not a lot of money.
If you’re being ripped off by a couple hundred dollars, will you call the SEC to file a complaint? Probably not…especially since it’s difficult to prove that high frequency traders are ripping you off. And it’s impossible to quantify exactly how much is being stolen.
The SEC has a straightforward mandate: “The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”
Despite defending the current structure of the markets, White did admit that the market is not perfect. But she continued to defend the markets, saying “I want to be very clear that the market metrics suggest that the retail investor is very well-served by the current market.”
It’s clear that individual investors like you and me are better off now than we were 20 or 30 years ago. Thanks to electronic trading, the cost of buying or selling a stock has dropped from $50 to less than $10. The bid / ask spreads have narrowed to pennies. And the Internet now provides individuals with information that was previously available only on the Bloomberg terminal.
But it’s also clear that high frequency trading is an extra hidden fee being charged to every investor in nearly every transaction.
The SEC is choosing to ignore high frequency trading as a “cost of doing business.”
Thankfully, we live in a country where there are free markets. And those markets are likely to develop a far superior solution to any rules or regulations that the SEC might pass.
In fact, the free markets are already creating a solution to stop high frequency trading.
I’ve told you about How a $1.95 Trillion Fund Manager is Stopping High Frequency Trading in its tracks. And Chris Preston has explained how a Canadian is setting up a new stock exchange for investors.
That new stock exchange is called IEX.
You’ve probably heard about IEX founder Brad Katsuyama. He’s the hero in Michael Lewis’ bestselling book – Flash Boys: A Wall Street Revolt.
The book is a must-read for every investor. It’s a thrilling story that explains how a handful of Wall Street insiders exposed the biggest financial fraud of the decade.
At Wyatt Investment Research, we struck a special deal with the publisher. We’re giving away 500 free copies of Flash Boys to loyal Income & Prosperity readers.
I have just a few copies of the book left. I expect they’ll be gone by tomorrow. You can claim your free hardcover copy of Flash Boys today by clicking here.  Act now to secure your free copy of this bestseller.