Commentary on Political Economy

Sunday 7 March 2021



Are markets really rigged?

Vlad Tenev, co-founder of Robinhood Markets, speaks during a US Congressional hearing © Bloomberg

Congressional hearings lack stateliness in the virtual realm. The pomposity is starker without the grandiose backdrop of the Capitol Building, while technical snafus and amusing unmuted asides can trivialise any subject. But they can still produce understated drama, as the recent hearing over January’s stock market tumult showed. 

On February 18, the House of Representatives’ financial services committee grappled with the outlandish GameStop saga. It looked at how the video games retailer suddenly became a battleground in a titanic tussle between a bunch of hedge funds betting against it and a horde of aggressive retail traders loosely organised on a spicy Reddit forum.

The online brokerage Robinhood emerged as the hearing’s main target, with its co-founder Vlad Tenev peppered with questions and criticisms over its decision to restrict trading in GameStop at the peak of the turmoil. Although forced into doing so for regulatory reasons, many Reddit traders suspected that it was quietly doing the bidding of Wall Street.

However, the unstated defendant at the virtual trial was the integrity of America’s financial markets. Despite several participants paying lip service to them being the “envy of the world”, it appears that an increasing number of Americans think markets are somehow “rigged”. To them, GameStop was not just a stock market gamble but a rebellion.

“I don't think of my purchase as an investment, but as putting my own skin in the game as a fuck you against a rigged system,” a user called One_Guy_One_Jar said on Reddit. Another user ILikeCatsAndPlants posted: “This isn’t an investment for ourselves, it’s an investment in breaking the parasite class.”

Setting aside bigger and thornier questions about the fairness of the broader economic system — or the integrity of the finance industry as a whole — is the US stock market really “rigged”, whatever that may mean?

Dennis Kelleher of Better Markets, a financial reform advocacy group, is in no doubt about the answer. “Anyone who says this system isn’t rigged isn’t being honest,” he argues. “We have an incredibly fragmented market system with layers of created complexity that serves no purpose other than to conceal the wealth extraction that the system now serves.”

To many in finance, the often amorphous vitriol — and the conspiracy theories it often nurtures — is baffling, frustrating and worrying. They say the complex US market ecosystem is mostly a product of its messy evolution, inertia, myriad often conflicting vested interests and the remorseless march of technology. 

Maureen O’Hara, a finance professor at Cornell, expert on stock market microstructure and an author of a book on Wall Street ethics, cautiously agrees. Although markets have always been an inhospitable environment for amateurs, by almost every measure American equities are more transparent, cheaper to trade or invest in, and better-policed than ever before, she argues. Far from perfect, of course, but not the cesspit of dodgy dealings that many think.

Bar chart of Improvement derived from comparing executed orders versus "National Best Bid and Offer" at the time. ($bn).  showing Total price improvement in January by top four retail market-makers

O’Hara sees the current distrust of markets as the result of myriad toxic factors, such as low levels of financial literacy; uniformly malignant depictions in popular culture; and the long shadow of the financial crisis and the feeble crackdown on malfeasance in its wake. The fact many ordinary Americans have no savings in the stock market and are unable to reap its benefits doesn’t help. 

Should a “fair” market mean that ordinary, individual investors have the same chances to succeed as amply-resourced investment companies stuffed with professionals that have dedicated their entire lives to trading and investing? That would be like saying a pub football team should be able to compete with a Premier League side. What matters is that the rules of the game are the same for all sides. And this may be a controversial view, but it is hard to see concrete, meaningful and malignant examples of where they are not.

But critics and defenders of the current market ecosystem agree on one thing: the vibrancy of the financial system depends on people’s willing faith and participation. The current distrust in markets is now so entrenched and profound it arguably represents a subtle, insidious threat to its overall health. 

Gary Gensler is on course to be confirmed as the new head of the Securities and Exchange Commission. He faces a mammoth inbox. Yet the biggest overarching challenge he will face will be to restore some of the credibility of US financial markets among ordinary Americans. Drastic actions may be necessary.

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