Final Essay (Read attachment)

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Bringing the Bell to your Home

“It’s four o’clock on Wall Street; do you know where your money is?” These are the words uttered every weekday afternoon by a CNBC television analyst as the financial markets close in New York.  The fact of the matter is that there is no excuse to not know the status of one’s investments today because of the onslaught of financial technology available to individuals at home over the internet.  The growth of individual investing is undeniable where currently, there is almost triple the number of shares traded per day on the New York Stock Exchange than in 1990 (Rodier); the spark behind the surge in popularity—the emergence of online discount brokers.  Figure 1 illustrates this boom in trading volume derived from the advent of the internet.  Beginning in the 1990s, the slope is noticeably more vertical than it has been historically.

Figure 1._ Volume of stock traded per day on the NYSE on average (in millions)

Buying stock was once thought of as a game for the affluent.  Alumni from prestigious universities controlled the trading firms and wouldn’t even accept an incomer as a client unless he or she was of a specific net worth.  The exclusivity of the practice was toned down a fraction in the 1980s as the baby-boomers attained working age and a middle class emerged.  However, true participation in the markets did not occur until the Charles Schwab Corporation took its investing operations into cyberspace in the mid-1990s.  Since then, it is estimated that over 65 million worldwide have opened an online trading account to find their own path to riches (Discount).

The Foundations of Internet Brokers—Technical Analysis

Considering the lack of extra time the majority of working class adults have, it seems staggering that so many have transferred their funds from full service stockbrokers or local financial planners to no-frills internet brokers.  Compromising for the lack of superfluities is a technique known as technical analysis.  This form of research is the foundation for tools offered by online brokers and is seen as a statistical approach towards predicting future price patterns in securities.  Thousands of books and articles have been published in the last decade exemplifying the ease and surety that this method provides for amateurs.  The endorsement and public recognition of the practice opened the floodgates for novices to put their money at risk using the cheapest means of trading possible—online brokers (Hobbes).

Can it really be that simple?

The illusion spread like wildfire, beginning with testimonials and advertisements of average people quitting their day jobs and increasing annual income by two or three hundred percent by trading securities online using technical analysis.  Devin Hobbes, a columnist for a prominent financial news service, is a skeptic of the whole practice.  He argues that it is unrealistic to think that any random person with no knowledge of financial markets could outperform an experienced professional trader using some “hogwash method.”  To protect the integrity of the lucrative business, others in the industry cited a common philosophical reason for the use of technical analysis by amateurs.  The logic developed by Paul Ree, a 19^th century philosopher, sounded like this:

Humans have a tendency to ignore what is complex.  We accept the simplest methodologies because we do not have to spend a lot of time comprehending them.  Simple reasoning is sufficient in depth for most people on this Earth (Bailey 498).

Meeting the Public’s Demands

Fortunately for online firms like E*TRADE Financial and Charles Schwab, few novices listened to the critics and instead countered by arguing that technical analysis was backed by mathematically precise models.  The fact of the matter was that the technique was producing positive results for many with little experience from the comfort of their own home.  Word of the success spread quickly as an influx of people quit their day jobs to have the liberating feeling of trading stocks full-time (Anderrson 133-134).  At the turn of the century, enormous advertising campaigns were launched by two industry leading firms, “Talk to Chuck” and “The E*TRADE Baby,” that propelled an unprecedented stage of growth where each firm was adding approximately 750 new accounts under management per day for a period of five years (Pandita).  To satiate the demands of their loyal traders, online brokers turned to technologically-advanced trading platforms (see Figure 2) that would seek to further enhance innovation of stock trading over the internet.

Figure 2._Technical analysis chart with price movement and three lagging indicators

The Truth behind Technical Analysis

The increase in use of technical analysis is without a doubt, directly correlated to online investment brokers and the high-tech trading platforms they create.  Appearing to be a successful technique now, a persistent student of the stock market explains why inconsistencies will develop.  Trading professional Barry Moore explains on his website (liberatedstocktrader.com) that strategies only work when they are exclusive.  In other words, once a majority of traders begin using technical analysis, it will be ineffective due to the mere fact that everyone will want to trade specific stocks, at the same time, in the same manner.  The lopsided amount of traders looking to either buy or sell will inadvertently cause a price action to move in the opposite direction because supply will dry up quickly.   Moore does not dismiss the notion that acting in the opposite manner of what the technical analysis tools indicate will probably be more successful in the near term than following the psychology that the majority of traders will take confirming what they believe are true indicators derived from the tools.  

The math inherent in technical analysis invalidates the method for most experienced traders.  As mentioned earlier, a major skeptic of the practice Devin Hobbes asserts, “Technical analysis is unreliable because of its foundations.  It produces lagging indicators on the screen, but these indicators are just that—lagging.”  In its purest form, technical analysis offers readings for investors to interpret based on what has happened in the past.  The common consensus among professionals is that the past has little to no affect on future prices; therefore, technical analysis has no true basis in determining what actions should be taken when trading stocks.

The Looming Extinction of Wall Street

 “We don’t need those high-priced salesmen,” replied Andrew Klein, a hopeful entrepreneur trying to convince his partner that the use of an investment banker was unnecessary to complete his particular financial transaction (86).  Responses such as Klein’s have been appearing at an increasing rate in financial discussions and internet blogs in recent years.  As aforementioned, with a substantial number of investors taking their business to online discounters, the high priced brokers and bankers in New York’s world renown financial district have much more free time on their hands these days.  Managing one’s own finances online saves money on commissions, advice, and fees typical stockbrokers would charge.  Despite the fact that money is flowing away from financial service institutions, it appears irrefutable that many of these larger firms have an unfair grip on the markets. 

“The House Always Wins”

In his article, “The House Always Wins,” Alex Marchand accuses Wall Street institutions of engaging in manipulative practices.  “They are like casinos,” Marchand says, “When you have the resources to determine the direction of a market, you can’t lose.”  The most prominent distinction that separates these institutions and individual traders online is the “resources” Marchand alludes to.  While both groups have the controversial technical analysis charts mapped out on their desktops, the insider information is what online investors will never have that maintains this disadvantage.  For example a home trader from Oregon has no possibility of knowing how an executive of a publicly traded company will act regarded a certain dilemma facing the company; conversely, a trader from a Wall Street institution can call the executive up and have lunch or exercise at the athletic club with him in order to get the ‘inside scoop.’

The statistics supporting this “house advantage” are publicly known and confirmed by the fact that two of the most profitable firms in the United States, Goldman Sachs and JP Morgan, both had no losing days of trading from January to April of 2010 (Marchand).  So many consecutive days of success cannot possibly be due to the technical analysis tools, otherwise most home traders would have eight figure annual incomes.  Knowledge from insiders is far more trustworthy than some lagging indicator on a chart; therefore, those who can obtain the secretive information will always have the advantage.

Home traders are not at a complete loss in regard to the lack of information; a Duke professor recently conducted a study on how the internet has improved transparency between Wall Street and Main Street.  In her article, Linda Yi advocates regulation requiring corporations to disclose SEC filings such as accounting reports on taxable income and deductions, revenue, and cash flow.  Due to the Sarbanes-Oxley Act passed in 2002, every publicly traded corporation must now release quarterly reports to the public in order to maintain a rapport with shareholders and the communities in which the operations occur (How the SEC).  The unfortunate truth is that many Wall Street traders will continue to exploit the system.  Before the 2002 Act, only professionals had extensive access to accounting information on companies; now everyone has this information available to them, but professionals working for financial institutions have access to it first.  By the time the reports are filtered to the public, the effect of the news has already been priced into the stock.  In this way, home traders only know old news; and as the adage of the stock market goes: Old News is Worthless News.

Will investment technology ever create an even playing field?

            As discussed earlier, technical analysis is an inconsistent way in which traders from home attempt to profit like the professionals do.  There is little evidence to support the success of this, however, there are a few features offered by online brokers that do improve the opportunity of individual traders to gain knowledge that aids in the investment decision-making process.  The Duke professor Linda Yi explains how events such as road shows (a marketing event for a new company trying to rally a group of investors to support the company by buying stock) that were once exclusively from institutional investors, are now webcasted so they can be watch from home.  The internet has allowed for other insider events to be available via webcast such as conference calls given by executives and shareholder meetings in which corporate officers update the status of the company and explain their objectives and direction for the future.  Such insights can be indicators for investment decisions, but must be used with caution; most important to remember is the fact that thousands of others are receiving the same message and will act in the same manner, which will produce insignificant results.

    Through my findings, it appears inevitable that those with the most resources will always be a step ahead of the rest.  I can conclude that the only way an individual can consistently profit in financial markets is not by using the latest technical indicator discovered or reviewing notes and meetings of companies available to the public, but by increasing the time horizon in which one will seek to hold a security.  Technical analysis has done a great thing for long-term investors; it has provided liquidity in stocks (Rodier).  The quick trading style that technical analysis has produced among many of today’s market participants has increased the amount of ‘real money’ flowing in to and out of stocks.  The day-trading practice helps the buy and hold strategy of long-term players because more money is flowing through any particular stock which maximizes the tendency that the market has established a long-term upward growth trend.  Through an understanding of liquidity and the natural trend of markets, an individual investor can ignore the technologically-advanced tools produced by online discount brokers and battle the big players on Wall Street from the confines of his or her own home. 

            List of Works Cited

Andersson, Jenny. "Creating the Knowledge Individual." The Library and the Workshop: Social Democracy and Capitalism in the Knowledge Age. Stanford, Calif.: Stanford UP, 2010. 133-38. 

Bailey, Andrew. "The Illusion of Free Will." First Philosophy: Fundamental Problems and Readings in Philosophy. Peterborough, Ont.: Broadview, 2006. 492-507.

"Discount Broker." Reference for Business. 2010. 11 July 2010. <http://www.referenceforbusiness.com/encyclopedia/Dev-Eco/Discount-Broker.html>. 

Hobbes, Devin. "Does Technical Analysis Really Work." Seeking Alpha. 11 Dec. 2008. 14

July 2010. <http://seekingalpha.com/article/110193-does-technical-analysis-work>.

 "How the SEC Protects Investors, Maintains Market Integrity." U.S. Securities and Exchange Commission (Home Page). 29 Jan. 2010. Web. 15 July 2010. <http://www.sec.gov/about/laws.shtml#sox2002>.

 Klein, Andrew D. "The Internet Breakthrough." WallStreet.com: Fat Cat Investing at the Click of a Mouse ; How Andy Klein and the Internet Can Give Everyone a Seat on the Exchange. New York: Henry Holt, 1998. 85+.

Marchand, Alex. "The House Always Wins: The Wall Street Casino." Dissolving Dollars. 13 May 2010. 14 July 2010. <http://dissolvingdollars.com/the-wall-street-casino>.

 Moore, Barry. "Stock Market Guide--The Trader's Checklist." Liberated Stock Trader. 2010. 14 July 2010. <http://www.liberatedstocktrader.com/tag/checklist/>.

Pandita, Meenka. "Online Trading Has Gained Immense Popularity." June 2010. 11 July 2010

<http://www.articlesbase.com/investing-articles/online-trading-has-gained-immense-popularity-2717525.html>.  

Rodier, Melanie. "The Possible Long Term Benefits of High Frequency Trading." Wallstreet and Technology. 23 June 2010. 11 July 2010. <http://www.wallstreetandtech.com/trading-technology/showArticle.jhtml;jsessionid=3RA5LRHVJZY5RQE1GHRSKHWATMY32JVN?articleID=225701097>.

Space Jock. 12 July 2010. <http://www.spacejock.com/images/pro_smpl.gif>.

Stat.Fi. 12 July 2010. <http://www.stat.fi/tup/suomi90/toukokuu_en_001.gif>.

Yi, Linda J. "Taking Investors for a Ride on the Information Highway." Duke University. 08 July 2010. <www.law.duke.edu/shell/cite.pl?52+Duke+L.+J.+243+pdf>.