[Like your editor, Rick’s Picks forum regular Wayne Razzi (aka “Red Will”) is a veteran floor-trader who grew up in South Jersey. When I asked him if he would like to contribute a guest commentary, I was not expecting the provocative tour de force that unfolds, step by step, below. In the essay, Will asserts nothing less that that the impending collapse of our economic system was meticulously engineered by financial and political sociopaths. Let me attest that his is not some whack-o conspiracy theory; rather, it is the closely-reasoned argument of a highly intelligent person who values truth sufficiently to have searched for it, in the form of an answer to a profoundly disturbing question, for many years. Judge for yourself whether his conclusions tally with your own thoughts as to why the American Dream is about to go bust. RA]
As a regular reader of Rick’s Picks and occasional commentator within the forum, I was happy to accept Rick’s offer to contribute a guest commentary. Unfortunately, my happiness faded rather quickly as each day of the week passed and with each, more and more commentary appeared within the forum. Normally I am pleased to read through the robust collection of viewpoints and argumentation. However, and quite regrettably, these are not normal times! With each day, and each comment, and each reply, I witnessed a slow motion, apathetic paraphrasing of much of my prepared commentary by faceless strangers!
So with my best-written plans bested by many of you bloviators. ;- ) , I elected to go with something entirely different instead of offering my all-too-similar take on many of the economic issues that were covered and subsequently expanded upon within the forum.
I have a few things in common with Rick, one of which is having been born and raised in southern New Jersey. We also share the fact that both of us spent at least a decade or so as a professional on-floor equity options market maker. I note this commonality because there is a tendency amongst peer traders to assume that everyone “knows what we know” and ironically, many of the same traders also believe that they have some sort of proprietary edge that many other traders do not possess. Thinking of this is what helped me to find what I hope will be a little fresh material for you.
I am going to present few disparate items here but I believe that there is one singular lesson that is worth learning and worth learning now more than at any other time in my career. I will start off with the “micro,” by which I mean something that I can testify to from having witnessed it within my own little world. I cannot speak for Rick, but I would suspect the same.
Incompetent, But Curious
After being hazed all day and into most evenings by my firm’s Options Specialists for about six months, I was given a seat on the trading floor. It is from that point on that I began the conversion from business school idealist to incompetent cynic. In fact, well before I officially became a trader, I witnessed “broad daylight” collusion every day. The myths of the “fair and orderly market” and the “competitive open outcry system” were dispelled almost immediately as soon as I had learned enough as a trainee to be able to slow down the frenetic action to a pace that was comprehensible.
What do I mean? Why is this important? Well, in theory, the traders of options on a given stock are supposed to be competitors that do not cooperate with other members to set market prices on which the public will execute trades. The reality is that the main trader, typically the specialist, makes the bid-ask spread market and the majority of the time the entire trading crowd simply states their level of commitment to the market that he has made.
Here is the problem, OUR watch-dog, the SEC, rarely if ever has done anything about this clear violation of the law. Many techniques and devices are employed to encourage market makers to play ball. Any time spent on some of the options floors over the years would have revealed this to the SEC. This means… they know it and they just do not care. They have always known it.
This may not be a revelation here in 2010 with Rick’s “crowd” being a rather enlightened one, but 20 years ago this matter-of-fact flouting of the law initially stunned this “Econ/Finance” dual-major as these business practices were conspicuously absent from the textbooks. What does this prove? It proves what many of you — but until recently not nearly enough people — believed: The government is entirely about strategic, selective prosecution. Shocked, right? The government and the markets are corrupt! I am sure that many of you are floored! Hold on though, I am “going somewhere” with this as it is stated.
As you have probably already guessed, this “welcome to the real world of our markets” experience put me on a path that would shatter nearly all of my idealistic beliefs about a country with systems that I was raised to revere. Just in case you weren’t sure how corrupt things actually are within our markets, it’s my hope that any faith that you may have reserved is fully gone by now because if it can happen in plain view amongst competitors then much more can clearly occur behind closed doors. Let’s get back to that “assume that others know what you know” concept and in doing so, we’ll leap ahead in time by about five years.
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