How Big Tech Screws Retail Investors (And What To Do About It)
Dear Fellow Retail Investor,
I once had an online business that sold holistic health information.
And over the 13 years I ran it, monthly income grew from $0 to about $3,000.
Not a fortune… but it was a hobby business I enjoyed (and I didn’t mind the extra money).
All that changed in 2012.
That’s when Google unleashed its Penguin algorithm.
See, Penguin gave “authority” health websites (like WebMD) algorithmic advantages over mine.
So I went from a top 5 ranking for my best keyword searches to virtually disappearing from the Google index…
As you can imagine, my income plunged.
The Penguin algo also ruined countless other small business websites.
Why am I sharing this story with you?
Big Tech algos also hurt retail investors like you
This is nothing new, of course.
Automated computer trading took off in the late 1980s, and big investment funds have been screwing retail investors with it ever since.
Today, thanks to computerized high frequency trading (HFT), they can make trades in milliseconds.
All that speed allows institutional investors to:
Front-run the markets…
Drive prices up or down to their liking…
And exit their positions for lightning-fast profits (at your expense).
But that’s not the worst of it.
HFT also enables institutional investors to flood the market with limit orders… then cancel those orders a fraction of a second later.
This is called spoofing.
Spoofing creates an illusion about the supply and demand of the targeted stock (or other tradeable asset).
And – no surprise – it’s designed to cause prices to artificially change.
What happens is retail investors interpret all the phony activity from spoofing as real trading.
Then they act on that assumption to the benefit of the spoofers.
Think that’s bad?
It gets worse – because the power of spoofing can be enhanced exponentially with complex algos.
Are You Ready For The Next Market Move?
This not only cheats honest retail investors, it can also cause market flash crashes
Take the flash crashes of 2010 and 2015.
During the flash crash of May 6, 2010, the Dow declined 9% in just five minutes.
Think that triggered a few stop-loss orders?
Former Security and Exchange Commission (SEC) Chair Mary Shapiro said so.
Shapiro, who was SEC Chair at the time, estimated that the 2010 flash crash caused over $2 billion in stop-loss orders.
All those stops were triggered in just one-half hour.
And Shapiro said if each of those stop-loss orders had filled at 10% below the previous close, individual investors who had been stopped out lost around $200 million.
A single London trader is believed to have triggered the 2010 flash crash through spoofing the market (he pleaded guilty to that charge in 2016).
The exact cause of the Aug. 24, 2015 flash crash – which lopped 1,100 points off the Dow in the first five minutes of trading – isn’t entirely clear.
But what is clear is that there was a huge market selloff in Asia the previous day.
And that selloff likely played a huge role in a wave of panic selling that plunged the market the next morning.
You can bet that HFT accelerated all that selling pressure.
HFT and algos aren’t the only ways Big Tech hurts retail investors
Many online brokers charge a fee to market makers for taking the other side of a trade.
In exchange, the market makers get a peek at those orders a few milliseconds before they’re filled.
In other words, they get to see the order flow ahead of retail investors.
Result – they can front-run the market and pocket the spread… at your expense.
So what can you do to protect your portfolio from Big Tech?
Here are some suggestions:
Invest with an on-line broker that doesn’t accept money from third parties.
Brokers are required to disclose whether they’re compensated for order flow. If yours is compensated, you can switch.
Three that do not accept payment for order flow (PFOF) include:
- Merrill Edge
Invest for the long term.
If you minimize your stock buying to high quality, fundamentally sound companies and hold for the long term, there’s little for high frequency traders to make money on.
See, high frequency traders prey on active trading and capitalize on the inefficiencies of the exchanges.
By making your investing time frame longer, you take away any advantage they have.
Invest in small-caps.
Hardly anyone knows about them… and their upside compared to large-caps is MUCH higher.
Here’s a real-life example of the power of small-caps to supercharge your portfolio:
Back in December of 2018 I wrote an article about the Workhorse Group (NYSE:WKHS).
This is an Ohio-based electric vehicle manufacturer that had a market cap of about US$25 million at the time. And the stock price back then was about 55 cents (US).
Over the next 18 months, the stock gradually climbed, reaching US$2.75 or so by May 2020.
Result – a solid 400% gain.
Not bad, right?
Then, the stock really caught fire.
Rumors in May 2020 began circulating about the company getting a huge financing deal.
By June 1, the rumor had driven the stock to about US$17 a share!
Four weeks later the company actually got the financing ($70 million from an unnamed institutional investor).
That set off an investor frenzy that drove the stock to nearly US$42 in February 2021.
From $0.55 to $42. That’s a 7,536% moon shot – the kind of gain that can change your life.
And if you’d bought the right call option on that stock, you could have been in position to retire in luxury.
As you can see, the advantages Big Tech gives investment funds over retail investors like you are formidable… but not insurmountable.
Here at Dear Retail, we’re committed to providing you with insights to help you to overcome them.
We’ll also give you other tools and resources to help you become a more profitable investor…
Like tips on under-the-radar stocks that are in a strong position to profit, today’s best sectors to invest in, and other entertaining tidbits you can impress your friends with.
(It’s not all work and no play here.)
As a Dear Retail contributing editor, I’m proud to be a part of this effort.
I only wish there was an algorithm to help my old website.
Anyway, that’s it for today – thanks for reading.
To your financial independence,
Are You Ready For The Next Market Move?
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