Dark Side of Trading: 2 Market Forces that Destroys Small Investors

Hey Tribe,

Have you ever wondered why your perfectly researched stock takes a nosedive just when you thought it was about to skyrocket? Or how some traders seem to make money no matter what the market does? The answers lie in understanding the hidden hands that drive the market: Market Makers and Market Manipulators.

The Two Forces: Market Makers and Market Manipulators

These two market forces—Market Makers and Market Manipulators—operate in the shadows, yet their impact is felt by every trader and investor. Understanding who they are and how they operate is crucial to protecting your investments from their potentially disastrous effects.

#1: Market Makers: The Silent Profiteers

Market makers are the engine that keeps financial markets running smoothly. They provide liquidity by continuously quoting both buy and sell prices for securities, ensuring that you can trade at any time. But here’s the catch: they’re not in it to help you. They’re in it to profit from you.

As Ken Griffin, the founder of Citadel Securities, once revealed, "I was shocked when I realized that market makers made money regardless of whether I made or lost money." This statement is a chilling reminder that market makers are always on the winning side of the trade.

How They Profit from Your Trades

Market makers earn money through the bid-ask spread—the difference between the price at which they’re willing to buy a security and the price at which they’ll sell it. For example, if you buy a stock at $100.05 and sell it at $100.00, the $0.05 difference is their profit, and your loss. Multiply this by millions of trades daily, and you can see how they rake in billions.

Statistics: In 2020 alone, Citadel Securities reportedly made over $6.7 billion in revenue, with much of this coming from its market-making operations. This was a record year, driven by the volatility and trading volume during the COVID-19 pandemic. The fact that they thrived in a year when many investors saw their portfolios decimated should be a wake-up call.

You can be part of the Market Makers …

Do you know as an individual, you can be part of Market Makers (Liquidity Providers). A friend of mine, Terence has been doing this for years and raking in millions…

Here’s the irony, he doesn’t even trade or invest but he made millions from the financial markets without risking any capital.

If you have not heard his sharing, it can be very shocking, here is the link to register for his sharing. (He doesn’t call it market making upfront, but it is a webinar every investor should attend to understand the impact!)

https://www.ascensionmasterclass.com/tnlbonus

#2: Market Manipulators: The Wolves in Sheep’s Clothing

If market makers are the silent profiteers, then market manipulators are the outright predators. These bad actors use deceptive tactics to influence the market in their favor, often at the expense of small investors. Their methods range from "pump and dump" schemes to "spoofing" and "wash trading," all designed to create false signals that lure investors into making poor decisions.

The Pump and Dump Trap

In a classic pump and dump, manipulators hype up a low-volume stock, driving its price up through false or misleading information. As the price climbs, unsuspecting investors jump in, thinking they’re onto the next big thing. But just as the stock peaks, the manipulators sell off their holdings, leaving the price to plummet and the latecomers with devastating losses.

Real Case: The "Wolf of Wall Street," Jordan Belfort, masterminded some of the most notorious pump and dump schemes in the 1990s. His fraudulent activities led to massive losses for investors and eventually landed him in prison. His story is a stark reminder of how dangerous market manipulation can be.

Spoofing: The Flash Crash Catalyst

Spoofing is another tactic where manipulators place large orders they never intend to execute. These orders create the illusion of market interest, driving prices up or down artificially. Once the market reacts, the spoofers cancel their orders and trade in the opposite direction.

Real Case: Navinder Sarao, a British trader, used spoofing to manipulate the futures market, contributing to the 2010 "Flash Crash," where the Dow Jones Industrial Average plunged nearly 1,000 points in minutes. This event erased $1 trillion in market value, though much of it was recovered by the end of the day. It’s a powerful example of how manipulation can wreak havoc on markets—and on your portfolio.

Why Small Investors Are at Risk

Small investors are particularly vulnerable to these forces for several reasons:

1. Lack of Information: Unlike institutional investors, small investors often lack access to the same level of information and sophisticated tools that can help them spot manipulation or understand the true dynamics of market making.

2. Emotional Trading: Market makers and manipulators prey on emotions—fear and greed. When prices swing unexpectedly, it’s easy to panic and make rash decisions, playing right into their hands.

3. Volume Disparity: The sheer volume of trades handled by market makers and manipulators dwarfs that of individual investors. This volume allows them to move markets in ways that small investors can’t predict or counter.

Statistic: According to a study by the Financial Industry Regulatory Authority (FINRA), over 70% of day traders lose money. Many of these losses are due to the impact of market makers capturing spreads and manipulators distorting prices.

How to Protect Your Portfolio

Now that you understand the threats, here are some strategies to protect yourself:

1. Educate Yourself: Knowledge is power. The more you understand how these forces operate, the better equipped you’ll be to navigate the market safely.

2. Use Limit Orders: By setting limit orders, you can control the price at which you buy or sell, reducing the risk of getting caught in a market maker’s spread or a manipulator’s trap.

3. Diversify Your Investments: Spreading your investments across different assets can help mitigate the impact of any single market event. Diversification is your best defense against market manipulation and the inevitable impact of spreads.

4. Invest for the Long Term: Long-term investing helps you avoid the short-term noise created by manipulators and the constant skimming by market makers. As Warren Buffett advises, "The stock market is designed to transfer money from the Active to the Patient."

Final Thoughts

The dark side of trading is real, and it’s filled with forces that can destroy your investments if you’re not careful. By understanding the roles of market makers and market manipulators, you can arm yourself with the knowledge needed to protect your portfolio and make more informed decisions.

Ken Griffin’s realization about market makers profiting regardless of investor outcomes should be a stark warning to all of us. And the stories of manipulation, from the "Wolf of Wall Street" to the "Flash Crash," should serve as powerful reminders of the dangers lurking in the shadows.

Stay vigilant, stay informed, and most importantly—stay patient. The market is full of hidden risks, but with the right knowledge and strategy, you can navigate it safely and successfully.

Together, Next Level

Sean