Market rigging is a widespread activity in the current markets. It refers to a situation where companies work together to prevent the market from functioning normally. In a normal condition, there are two participants in the market, which are the buyers and sellers. However, in the current period, intermediaries are playing the role of linking sellers and buyers. In market rigging, companies manipulate the operation of the market to gain an unfair advantage. Mr. Lewis, in many instances, has argued that the market is rigged. He 0065palined his thoughts in the book “Flash Boys,” which was highly criticized (Mazzola 12). Mr. Katsuyama also explains his experience of market rigging and how it works. However, various people have diverse ideas regarding the issue of market rigging. Some of them are in support of the arguments of Mr. Lewis, while other criticizes him. However, in real life situations, it is evident that the market is rigged. The paper will focus to explain ways in which markets are rigged in the current period. It will base the arguments on the speculations of Lewis and the experience of Mr. Katsuyama.
One of the arguments to support the speculation that markets are rigged is based on the role of intermediaries in the market. For a market to be efficient, sellers and buyers should be in a position to interact freely without barriers. However, this is not what is happening in a real-life situation. In the current period, some middlemen act as brokers in the market (Fox et al., 198). They negotiate the price of goods and demands on behalf of the sellers and buyers. In some case, it is very hard to purchase a commodity without passing through the middlemen. This amounts to market rigging because the brokers take unfair advantage of the opportunities in the market. The sellers get a relatively lower amount for their goods and services. On the other hand, buyers pay higher prices for commodities in the market. They include the commission of the broker in the amount of money they use for transactions. Thus, the availability of intermediaries to link the sellers and buyers amounts to market rigging (Olalekan 172). It shows that participants in the economy are deprived of some of the benefits they would have derived from their participation in the marketplace.
Another reason why markets are rigged is that there is no uniformity in the information participants in the market have. Some companies are in a position to get market information faster than others (Adrian 256). As a result, they tend to take advantage of other participants who are not informed. An example is a situation where the price of the share of a company decrease and some insiders have the information. They purchase the stock at a low cost without the knowledge of other participants in the market. After a short period, the price fluctuates again, and the insider can dispose of the shares at a profit (Charlie Rose interview with Michael Lewis). This implies that all the participants in the markets do not have equal chances of taking advantage of the opportunities which arise in the market. This means that some people in the market are willing to invest in shares of companies while others aim to enjoy unfair advantages. The people who buy shares of companies because they have insider information about the prices practice market rigging. Their main aim is not to invest in companies. They are intended to take advantage of other players in the market because they have more information about the market. This is a clear indication that the market is rigged. This creates a predator-prey relationship in the market (Naylor.52). Most of the big and smart investors are not aware of how the prices of shares change so frequently in the market.
The supporters of high-frequency trading have opposing opinions on market rigging. They argue that what matters is the speed of the internet being used by companies. From their arguments, it implies that there are participants in the market who can receive information about markets faster than others. They argue that microsecond matters. An example is given on the situation where a person tries to buy the shares of a company. However, upon clicking the buy button, he finds out that another person has already purchased them. This implies that there is a lot of competition in the market. High-frequency trading is a major contributing factor to market rigging. When a company purchases the shares of a company at a lower price, they can sell them to other players at a higher price.
High-frequency traders can detect changes in price at a very fast rate. In most cases, the costs of shares changes at a very fast pace, to the extent that players in the market are not able to detect it. As a result, high-frequency traders take advantage of such a situation. When the price of share changes within a short period, they can recognize it and purchase the share at the reduced rate (NPR, rigged wall street). Since non-frequency traders are not able to identify the change in price, they buy the shares at the initially indicated price from other investors. This implies that technology has played a significant role in enhancing market rigging (Bhupathi 377). Without advancement in technology, all the participants in the market would have similar information about the situation in the market. As a result, some investors would not take unfair advantage of the opportunities in the market.
Although high-frequency trading has played a significant role in enhancing market rigging, it has various advantages. First, it has helped to strengthen the operation of the stock market. Leading players in the economy can receive information about the changes in the market within the shortest time possible. As a result, they can adjust to the changes to avoid incurring losses (CBS news). High-frequency trading has enhanced the operation in the stock market. It enables investors to detect when there is a mismatch in the prices of stock in the market (Goldstein et al., 177). As a result, some people find advantageous while others do not. An understanding of high-frequency trading creates a lot of controversy in the market. With the use of high-frequency trading, only big investors can control the operation of the stock market. This makes other participants who are not able to access the technology disadvantaged. Additionally, HFT is influenced by distance. People closer to the area where the stock market exchange is being carried out are more advantaged. This implies that it enables some participants in the market to take unfair advantage of other investors, thus contributing to market rigging.
High-frequency trading has significantly affected the stock market. It has drawn participants who are not interested in investment. Their main aim is to take advantage of the opportunities which arise in the market. They watch for the prices to decrease to purchase the shares (CNBC, the great HFT debate). They, later on, sell them to the people without this technology at elevated prices. HFT has contributed to market rigging where people can take advantage of the people without this technology. It has also enabled participants in the market to get insider information about the prices of shares. As a result, markets are being manipulated to operate in abnormal conditions. This creates inefficiency in the markets.
In conclusion, there are various activities in the current period which are affecting the normal operation in markets. Most of them are associated with modern technology, which has enhanced the chances of participants getting information about the operation of the market. The biggest concern has been on the issue of high-frequency trading, which enables people to take advantage of other participants in the market. This technology has various advantages and disadvantages in the market. As a result, there has been controversy about whether high-frequency trading should be encouraged or not. From the arguments presented by different people, it is evident that markets are rigged. As a result, strategies should be put in place to prevent some participants in the market from taking advantage of other investors. First, policies should be put in place to regulate the time allowed between the purchase of shares and the time of selling (Prewitt 131). This will help to discourage participants who are not interested in investing in companies. When investors are not able to purchase shares and sell them immediately, market rigging will decrease, and there will be fair competition in the market.
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