My family has settled into a really boring and pointless Christmas tradition in recent years. This year was different.
I write about the markets and investing, my brother works for a private fund, and my cousin works for a major fund that's open to the public.
We're all inevitably in the same room at some point and we get pitched softball questions about the markets and investments.
This year took a desperate tinge that we haven't heard in years. If you're reading this, I'm sure you know why.
We had just hit the point where December 2018 was the worst on the books since the Great Depression, and it was clear the family was feeling it.
"What is going on in the markets?" "Should I sell?" "What is working?"
Here is the thing though. This impromptu family investment panel does not want to talk shop. We want to gorge on meat and pies.
Quite frankly, we shouldn't for most of the questions we get, on account of my brother's and cousin's direct involvement in funds. We understand this and we purposely say little of value.
This year was different though. We actually got to talking about who is actually making money these days in this whiplash-inducing market.
So we get the questions and we start the normal demure obfuscations. Then my brother chimes in with a simple sentence that was great.
"Just keep in mind that we're playing one game, and some massive investors are playing another, and we're doing it at the same time on the same field."
It was a great way to put what is going on right now. Granted it is overly simple and this is happening all the time, but we're feeling it more than ever now because the two games are crashing together and we're getting trampled.
We're trying to build wealth over time with a completely different set of rules.
We can't make our own markets. We can't really do much of anything on the sell side of the equation. We can't even access some of the most lucrative markets. We move slower. We pay WAY more to move money around.
Meanwhile there is a much bigger and faster game going on. It is one where traders can see all the moves their competitors are making in real time. They can see what we're doing before it even actually happens. They can move millions around in milliseconds. They can do it at virtually no cost.
We're stuck working around major players that actually thrive in high-volatility markets, and they can use us to their advantage.
Sometimes it isn't too bad. Recent years have been good to the buy-and-hold crowd. The other game has largely worked around us. That has drastically changed.
What my brother was referring to, and what we talked about, were the major investors who use the vast pools of billions of dollars in other people's money and market rules that are designed to give them massive advantages to siphon wealth from others whether the market is going up or down.
They can see when smaller investors go to sell, and they can sell before our orders go through. They sell at a better price.
Then when it pivots and money starts to flow back in, they can see it and get a better price.
They nickel and dime us with fees while making pennies off of us by entering their own trades once they see ours in the queue. And we're talking about billions and trillions of pennies.
Some of this is through trading in dark pools that massive funds manage by themselves. Some is through high-frequency trading. Some is through placing arbitrary time delays and restrictions on how quickly they'll execute trades on our behalf.
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But all these strategies do the same thing. They siphon off wealth by playing both sides of the trades we make.
It is big business, and it is really big when the markets churn like this. Two HFT firms, Virtu and Citadel, handle about 40% of daily stock trading volume alone. With volume and volatility up, they're doing a lot more business and pulling in a lot more pennies these days.
There is even a new exchange in the works that will be controlled by nine banks, brokerages, and HFT firms. Even if you don't directly invest through it, they'll be tempting your fund managers with the usual discounts and rebates, all to get the data and collect their tolls.
You're going to keep seeing a lot of the same headlines and advice in the coming weeks and months. It gets dusted off and dropped into articles year after year.
"Don't worry. Don't sell. Ride out market dips."
It doesn't seem very helpful, does it?
Just because that advice is true for most investors doesn't mean it does any good for people to hear it again and again.
They might as well just say, "Don't do anything. Just lie there and take it."
Instead, think about it the way my brother put it. "Just keep in mind that we're playing one game, and some massive investors are playing another, and we're doing it at the same time on the same field."
If you keep that in mind, it'll give you something to focus on. It'll keep your eyes on your goal.
There is a whole lot more that is going on in the markets to make it tougher for us. If you're worried, and no one should tell you that you shouldn't be, channel that into reviewing what you own in your portfolio and what your long-term strategy should be.
It won't take the sting out of market volatility, or the big drop we've seen in recent months. But hopefully it'll help.
Take care,
Adam English
Adam's editorial talents and analysis drew the attention of senior editors at Outsider Club, which he joined in mid-2012. While he has acquired years of hands-on experience in the editorial room by working side by side with ex-brokers, options floor traders, and financial advisors, he is acutely aware of the challenges faced by retail investors after starting at the ground floor in the financial publishing field. For more on Adam, check out his editor's page.