Ney's View of Market Dynamics
"It is no accident that most investors lose money in the stock market."
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The hard-hitting critic Richard Ney has written several books. His first, and most famous, is The Wall Street Jungle, written in 1970. He next wrote The Wall Street Gang. In the latter book he says:
Regrettably, the arrangements that exist to preserve the traditions and legalize the frauds of the security industry are inseparable from the general organization of a society controlled by the financial establishment, a society whose laws and principal customs have been contrived to serve the special interests of the financial community. Thus, although the Stock Exchange's most profitable practices clearly compromise the freedoms granted others by the constitution, Exchange Insiders are granted immunity from the legal obligations and penalties that should be imposed on them.
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If I haven't misunderstood Ney's position, markets move at the behest of the trading specialists. So, we should do what they do -- buy what they buy.
For the adherents of this approach, any other theory we might advance would reflect the fact that we'd be doing what the insiders want us to do, keeping our attention diverted from the real facts, keeping us from doing what the specialist does.
The premise is that we are being deceived -- it isn't "market" forces that move the markets, but "specialist" forces, i.e., the actions of the specialists themselves, playing the wholesale-retail game. [See piano master.] To play the markets successfully, we have to understand the dynamics of these insider forces.
Studying the transactions in each stock, I became immediately conscious that, on too many occasions to be a coincidence, a stock would advance from its morning low and then, often during the afternoon, would show an up tick of a half-point or more on a large block ... of shares. This transaction seemed to herald a transformation in what was taking place, for immediately thereafter the stock would begin to drop like Newton's apple.
At the end of several days of investigation, I discovered that these transactions at the top and bottom of a stock's price pattern were for the specialist's own account.
Merchandising
In this view of market dynamics, each specialist engages in standard marketing practices -- for his own benefit. He has control of the price action of each of the stocks in his stable. And he moves the price of each up or down to maximize his own profits -- by accumulating shares as he moves their prices lower, and distributing them, mainly by selling short, as he moves prices higher. He buys low and sells high, and in this way establishes the standards of play.
If the specialist were to buy and sell stock as needed to maintain an orderly market, there would be considerable risk to his earnings potential. But there is little danger. The stock market is a supermarket, a place where we buy our "groceries" and the "manager" sets prices.
The cultural response of most investors is based on the assumption that "if somebody is buying, somebody is selling"; not for a moment is it recognized that, in most cases, "if somebody is buying," it's the specialist who is selling; and "if somebody is selling," it's the specialist who is buying. Add to this the fact that investors assume that what happens to the economy or to the corporation in terms of earnings or sales determines the trend of stock prices, and you have the basis for a fallacious theory in which events in the market exist independent of each other.
Short Sales
A short sale is a transaction in which someone sells stock he doesn't own. He borrows stock (usually from a broker), sells it, and returns it when he buys later to cover his short position. The short sale is a major tactic in the specialist's arsenal of merchandising strategies.
Implicit in the use of the short sale by the specialist is the principle at the root of the investor's problems: the relationship between what the Exchange insider wants the public to do at the top of the market and what he wants him to do at the bottom. The insider can't maximize his points if the investor buys at the bottom and sells at the top.
At a top
, the short sale is used by the specialist to provide all the stock needed to halt an advance caused by public demand. In fact, because of the short sale, the demand may increase without even moving the stock.At a bottom
, short positions are covered to absorb what the public is selling, stopping the decline, usually at a pre-determined price. If additional purchases are needed to absorb the supply in a decline, the specialist buys it for his own account. Then he takes the price up again.
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Agreeing with Ney, Michael Templain says that the specialist "exists not to ensure the free and orderly trade of stock in a particular company, but to fatten upon the innocence of the small investor."
Lending even more weight to the specialist marketing argument, but now adding hedge funds, arbitrageurs, and brokerage houses to the list of culprits, Yggdrasil says:
[What] are the odds that the hedge funds, the arbs and the Wall Street pros won't sell first, in advance of the certainty ahead, and administer a "haircut" to the great herds of woolly sheep who want to believe? Or to put it in the vernacular of the Street, "Is the market an anticipatory mechanism [, or what]?"
The "certainty ahead" referred to in this quote is identified as follows:
Beginning no later than about 7 years, we will be faced with the reverse of the bull market that began in August of 1982. We will have about 30 years of uninterrupted net selling, as the baby boomer attempts to pull money OUT of the stock market.
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