February 15, 2016

The financial markets have always been manipulated and always will be manipulated. They are manipulated when they are free and they are manipulated when they are heavily regulated by government. If you choose to be involved in the markets, you should accept this reality. If you cannot accept this reality then you should get out of the markets and never return. If you try to change this reality by advocating greater government regulation of the markets then you are part of the problem.

Manipulating a market involves attempting to give yourself an advantage by encouraging the price to move higher or lower. For example, if you wanted to buy you would possibly try to create the impression that there is greater supply than is actually the case, prompting other traders to sell and causing the price to decline. If you wanted to sell you would possibly try to create the impression that there is greater demand than is actually the case, prompting other traders to bid-up the price. Whether currently legal or not, there is nothing ethically wrong with private entities using such tactics*.

A hundred years ago the manipulation of market prices was generally not considered to be unfair. In fact, highly-respected traders such as Jesse Livermore would sometimes be hired for the purpose of manipulating a market in such a way as to allow a large position to be either bought or sold at a better price than could otherwise be achieved. The best traders could do this by selling and buying in such a way as to create a false impression of the underlying market strength in the minds of other traders.

These days, governments are heavily involved in the financial markets in an effort to create a “level playing field”. As a result, the average investor has never before been at such a disadvantage. Rather than the likes of Jesse Livermore manipulating prices of individual securities from time to time, we now have central bankers treating the major financial markets as if they were puppets that could be moved in any desired way by pulling the right strings.

Never before have prices in the financial markets been so distorted and deceptive, but people now feel more secure because it is clear that the government and its agents are hard at work ensuring that nobody can take advantage of anbody else. Moreover, whenever anything goes wrong in the markets the popular outcry is: “The government oughta do something!” So, everytime something goes wrong and a lot of people lose money it creates the justification for even greater regulation with the stated goal of making the markets safer.

A lot of people are horrendously misguided. They believe that the right government regulations are needed to create a free market, but this only demonstrates that they have absolutely no idea what a free market is. A genuinely-free market is one that is devoid of government intervention. As soon as the government starts regulating a market, the market is no longer free. The greater the regulation, the less free the market.

Is there a reason to be optimistic that a shift towards freer markets lies in the not-too-distant future?

Unfortunately, no, because very few people are prepared to give up even an ounce of perceived security to gain a pound of additional freedom.

*Note: Not all actions that fall under the “manipulation” umbrella are ethical. For example, whether legal or not, it would generally not be ethical for a bank or broker to front-run the orders of its customers if doing so resulted in the customers getting a worse price. Such actions are a breach of trust and/or fiduciary duty. Also, regardless of whether or not its purpose is price manipulation, government involvement in the financial markets is generally unethical because governments operate with stolen money.

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