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Don't Get Bulldozed Playing the Wall Street Game

Sure, it's rigged. But you can play it to your advantage.

money, pro tips

Two hundred-plus years later, taking on Wall Street at its own game is like having 10 of your fraternity brothers over for a few beers and then lining up against the Seattle Seahawks. You’re totally outmatched. When you buy a stock, there has to be someone on the other side of the trade. There’s a good chance that guy has a staff of full-time researchers who know every publicly available fact about the company, and well-connected bankers who learned the nonpublic stuff on the back nine. If you’ve ever wondered if insider trading really goes on, just find a company that has recently jumped in price on big news, and look at the stock chart for the days leading up to the announcement. That sharp pre-announcement rise is not a coincidence.

Your disadvantage extends far beyond stock trading. Complicated financial products such as variable annuities and whole life insurance policies are lousy investments for you but great commission-generators for the guys selling them. You’ll never win an argument with them over the merits of the product—they do this every day—but here’s a tip: Financial advisors who are paid a flat fee instead of a commission never seem to recommend these products to their clients.

So how do you beat “rigged markets”? Strip away all the pros’ advantages. Never ever buy a complicated, expensive product. Don’t buy anything where the guy on the other side of the trade gets an advantage from being faster or having more information. Here’s how:

Name your price

I don’t recommend buying individual stocks, but if you do, set the price at which you’re willing to pay with what’s known as a “limit order.” That way no one can nudge your price higher through front- running or other means. This is a bigger issue for institutional investors trying to make multimillion-dollar purchases, but it could affect you, too, especially if you’re buying a thinly traded stock.

Keep in mind that the firestorm ignited by Flash Boys was over the fact that high-speed traders might push the price of a stock up by a penny. Until the 1970s, stocks traded in intervals of 12.5 cents. In other words, today’s “rigged market” is far cheaper than the best deal your dad could have gotten. Commissions were deregulated in 1975 and have been coming down ever since; now a trade that would have cost $800 back then will run you $8. 

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