Level Playing Field? Dream On!

So regulators in Massachusetts are going after that big investment bank whose alumni association seems to have taken over the financial governance of the country? Shocking allegations that big-paying customers actually get a heads-up ahead of the rabble have kicked the wheels of justice into motion. How can small investors ever be confident of any kind of level playing field if the authorities don’t step up and right this alleged wrong?

What nonsense! What foolishness! The very notion of a level playing field is a damnable lie. There is, was, never will be, never could be such a thing in the world of investing. Nothing could be more detrimental to your financial health (even if, no, make that especially if, you are not just a retail small fry with no institutional clout whatsoever) than to imagine otherwise. 

I was able to wise up to this reality at the very dawn of my investing career, at a once venerable but now defunct brokerage firm. Not only did it go without saying that the trading desk got the heads up before the sales force, but there were the practical constraints around the very notion of more than one party getting the proverbial “first call”. This understanding was advanced when I moved to a buy-side gig. It didn’t make much of a draw on one’s reservoir of common sense to figure out that even if you were some sales rep’s first call, it was not much of an edge if he or she wasn’t the first to hear it. Moment to moment, sentiment at the margin is an exceedingly fragile thing, so forget about actually doing something about your precious new insight once a half a dozen or so others have been similarly enlightened. The operative lesson here is that unless you really are in some position of exquisite privilege, it is a sure path to ruin to have a game plan dependent on advantages that, it turns out, exist only in one’s imagination. 

The absurdity of a "first call" being valuable was further reinforced during my years as a sell-side analyst, which is not to say that somebody, somewhere especially in the days of "Y2K gonna put us away", didn't score large from getting in while the wave was still forming. In my world, though, to the extent that I ever had anything "earth shattering" to share with the world, it was a simple matter to let the sales force sort out who hears it first. In time, I would learn that almost anything with profit potential larded into it was going to be so against the grain of Price Reality as to be wasted on most of the client base. The trick was to figure out who out there had the capacity to "get it", and when its time to spread the news, start with them. Insofar as these occasional insights more often than not prove highly valuable, in a long term price appreciation sort of way, advantage did indeed accrue to a select group of investors. But it tended to be based not so much on what they had paid in commissions as much as what they had paid in dues to the Done-the-Work, Thought-it-Through Club.  

There are good reasons that there is more than a little to the old maxim that “the rich get  richer and the poor get poorer”. However, as much as this tends to be true, it is not a truism along the lines of an immutable law of Nature. Advantages accrue to those who have the means to pay for intellectual firepower, who have staying power when emotion-charged inflection points stretch out in time, but these advantages most certainly do not trump entropy and its mad crush on unsustainable complexity. The big guys need every advantage they can get. Those of us who are not Masters of the Universe need not be dismayed. It is far from impossible to develop a workable game plan that is not dependent on access to a “first call” or a “trading huddle” (consistent execution of said game plan being another matter). 

What’s probably going on here with this non-story of a “thus it ever was” scandal is a bit of a show trial. Public trust of government has taken a bit of a hit of late, especially as it relates to that revolving door of an interface between Administration officials and Wall Street. Nothing really new there, of course, but hubris seems to have rendered it a bit too “in your face”. Somebody probably got the bright idea that the way to douse the fires of suspicion before they rage totally out of control would be to manufacture a harmless scandal and then show how much the powers that be care about fairness and the “little guy” by riding in and cleaning things up. A nice hefty twenty-minutes-of-a-good-trading-days-profits fine, and maybe truncating the careers of a few factotums who were a year or two from out-to-pasture anyway, ought to do the trick. And the Keepers of the Casino won’t mind one bit if it help perpetrate the delusion that an even break for suckers can ever be anything but a delusion.