Friday, July 12, 2013

The Changed Market Structure: How Markets Really Work

Today's "What's News" section of the Wall Street Journal online has a lead story titled: A Peek at Trucking Data, and Then the Stock Surged.
Glimpses of Key Figures Can Aid Investors in Truck Stocks, Soybeans, Bed Makers and Others.

Here are the opening three paragraphs:

"Just before the stock market closed March 4, an industry-research firm emailed a monthly report on commercial-truck orders to hedge funds and other subscribers that pay the group $1,700 a year for the exclusive service.

The early peek was worth the expense. The next day, after the bullish truck numbers were reported in the media, shares in truck makers surged, generating a tidy profit for investors who traded on the report in the late moments of the previous session.

Even as federal, state and congressional investigators examine the preferential release to investors of broad economic data—such as the University of Michigan consumer-sentiment survey—some investors tap numerous other more narrowly focused and less well-known industry indicators ahead of the rest of the investing public."

And here is my posted comment:

"Is this really about information for investing (i.e. longer term) purposes or is there the potential for collusion and short term profit by the use of the data that can serve as the justification for the short term market movements by those so inclined to be short term traders? For example, let's say that I am a short term oriented, story driven trader but I cannot, on my own, move a market but with a little help from friends can move a market, wouldn't I need some justification for action? And wouldn't I want that justification for action to serve as my legal cover? Enter the private service reports described in this article. As the article states, "The activity is widespread and legal. Federal securities law doesn't prevent investors from trading based on nonpublic information they have legally bought from other private entities.""

Investment Strategy Implications

Setting aside the misuse of the word "investors"*, this article describes an aspect of the financial markets as they function today but fails to connect the dots between the dominant forces in market action at the margin (short term trading), the nature of investors versus traders, and the points raised in the article. So, the larger issues here are (a) whether regulators have the insight and the authority to act on generally accepted market practices that are legal and (b) what is the longer term, lasting impact to the efficient functioning of the capital markets?

*Investors are longer term in nature. Getting the jump on a market is not what long term investors do. It's what traders do.

The Changed Market Structure is a new feature of this blog. Focusing on how the very structure of the capital markets have changed and the role financial innovation plays will be explored from time to time.

To learn more about Blue Marble Research Advisory and its integrated approach to investment strategy and decision-making, click here!

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