Specialists, The True Owners Of The Stock Exchange:
There are more than 125 million investors in
the United States today. Most of them are
losers. Not only do they loose their money,
they loose their self-confidence, their security,
and the chance they had at one time to use
their money to make a killing in the market.
Yet the fact is that to get the money needed
to invest in the market, most of these
investors had to be fairly successful in their
chosen professions. Many of them had
demonstrated an ability to think clearly, to
make plans for the future, and to carry them
out. Why then, using the same intelligence do
they go so very wrong when they try to make
money in the stock market?
The majority of investors do research the
stocks that they are considering purchasing in
order to acquire the information that they think
they need to make an intelligent investment
decision. Unfortunately, although the
information they researched might be useful
in the business world, it will be of little or no
use in the stock market. The acquired
information lacks predictability. However
smart the individual may be, if he or she
attaches predictive potentials to the
information that has no predictability, he is
using the wrong set of data to forecast market
events and is bound to foul himself up.
It is understandable why an executive of a
business might assume that the decision
making process which provided him with
results in his business has a specific
relationship to the conclusions upon which he
can base his predictions in the stock market.
In each instance he uses what he thinks is the
raw material from which he can make a valid
prediction about the future.
The conditions with a business differ from
those with the stock market in two ways: (1)
The owner of a business can lay claim to part
of the assets of that business; an investor in
the stock of a corporation listed on the Stock
Exchange has no claim to any of the assets of
that corporation. (2) The value of ownership in
the business is totally dependant on the sales
and earnings of the business; the value of
shares in the stock market has only a
theoretical connection with the sales and
earnings of the company’s stock. Because
good earnings can reinforce an investment in
a business, the assumption is often made that
earnings of a corporation listed on the NYSE
tell the whole story about the conditions under
which an investment can safely be made in a
corporation’s stock. To think this way is a very
large mistake, though it is a common one.
Investors confuse words with conditions, not
realizing that only identical initial conditions
can lead to identical results. The critical point
here is that words that are perfectly
satisfactory for use in one environment may
carry implications that are factually wrong in
another. For example, the usage of such
words as “good earnings” with the
assumption implied that they are an aspect of
rising stock prices, tends to warp judgment.
Consequently, it is impossible for most
investors to identify a contradiction between
“right” thinking and “their” thinking when they
buy stock. Because they equate words with
conditions, investors come to be ruled by
words.
The average investor’s errors in judgment are
a product of a distorted understanding of
situations caused by inadequate and
misleading verbal maps. His failures are a
consequence of trying to use the same verbal
maps that carried him successfully through
one territory to carry him through another,
altogether different territory.
For practical purposes, therefore, if the
investor wishes to change his emotional
reactions to market situations so that he can
profit instead of lose in the market, he must
be able to discard his old verbal maps and
acquire the skills and intuitions that allow him
to make new maps. In order for him to do this,
the investor must learn to break with tradition.
This will be difficult, since individuals tend to
be ruled by tradition. What most investors
have done is collect an inventory of routines
and procedures that they associate with
making money in the market.
For instance, it is customary for the average
investor to accept information secondhand
from his stockbroker, a newspaper’s financial
page, or textbooks. He “assumes” they are
all well qualified to provide him with reliable
information. Hence he fails to use his own
senses to survey and research the
environment in order to corroborate or
discount the value of observations passed on
to him by others. Customs such as this cause
the investor to move through the market along
a well-trodden path. It can be said, in fact,
that virtually all the investor’s actions conform
to the formulas of custom. This condition is of
course marvelous for Stock Exchange
insiders, since the more investors can be
depended on to conform to the established
routines, the easier it is for insiders to
anticipate and exploit them. It is hardly
surprising, therefore, that as investors charge
into the market at a rally high, a Stock
Exchange’s specialist is always there ready to
ambush them.
One of the investors’ main problems is that he
has been trained to believe that he is
investing in an “auction market”. For the
whole of the twentieth century there has been
a fundamental conflict between the theory of
an auction market and the whole scheme of
the NYSE. Playing according to the rules of a
game that has been rigged against them,
investors have failed to recognize that they
are the victims of the Stock exchange insiders
who, unknown to them, completely control the
market. As the market is configured now,
investors are involved in a system of financial
relationships that are not mediated by the
laws of supply and demand, but are instead
controlled by forces beyond the investors’
control. Instead of being in an auction market,
investors are confined within the framework of
an internal operation manipulated by Stock
Exchange insiders purely for their own profits.
Its functions and limitations established it as
an institution whose processes are actually
the opposite to those of an auction market.
Thus, when the public buys stock, their
demand is turned into a self-defeating
financial weapon that beats down stock
prices. Public buying has enabled Exchange
insiders not only to divest themselves of their
inventories of stock but also then to employ
practices that enable them to drop stock
prices profitably in order to re-accumulate an
inventory of stock at lower prices. Conversely,
when the public sells, they sell to insiders
who, firmly anchored in their own self interest,
will once they have “filled their accounts”
with an inventory of stock, raise stock prices
in order to set the process in motion that will
allow them to divest themselves of their stock
inventories profitably. Obviously, such an
institutional process such as this in no way
remotely reflects the structure of an auction
market.
Once specialists have established their
stock’s trend, their control over stock prices is
such that “neither” the government, the
corporations whose stock they supervise, nor
their customers have the economic muscle to
alter the internally controlled direction of the
trend. Indeed, the specialist system is like a
giant cartel whose members have divided
among themselves the proprietary ownership
of the American corporate complex along with
the exclusive rights to determine the upward
and downward movements of these stocks in
the interests of their own merchandising
objectives.
Most investors will probably never make
money in the market over the long run unless
they learn to look at the market as a giant
merchandising operation in which specialists
manipulate stock prices in order to sell at
retail what they had purchased at wholesale
price levels. If investors wish to preserve their
savings and see them grow, they must scrap
their traditional approaches to the market and
learn how to time their transactions so that
they buy when these insiders buy and sell
when they sell.
It is necessary to begin with a brief
description of who these specialists are and
how they totally dominate the market. The
role of the specialist would be easier to define
if he had only one function. As it happens, he
has two, and neither is consistent with the
other. In one he is according to theory, a
fiduciary with all of the obligations and
responsibilities pertaining thereto. He acts as
your broker’s broker to facilitate the execution
of your transactions. If you wish to buy or sell
shares of stock you would place the order
with your broker. Your broker would then
communicate your order to his firms broker on
the floor of the Exchange. He in turn would
then proceed to the post where the specialist
registered in the stock you wanted to
purchase was located. Since the specialist
presumably does not know whether your
broker wants to buy or sell, his response to
your broker’s request for a quote is to give
him the highest bid, (to sell) and the lowest
offer (to buy). Rules and regulations
supposedly circumscribe the specialists’
conduct as he functions in this capacity.
But the specialist, as it happens has another
role in which he is happily free to abandon his
responsibilities as an agent with its specific
fiduciary obligations to the public in order to
trade or invest for himself, in direct
competition with the public. There are few
investors who trade with him when he serves
them as an agent who are not beaten into the
dust when he invests for himself in
competition with them.
To the specialist his role as a broker’s broker
is in many ways a by-product of his function
as an investor for himself. He looks upon his
responsibility as a fiduciary as a side issue, all
be it a highly profitable one, that is conducted
in order to grant a semblance of legitimacy to
his more profitable activities as an investor
and trader himself. When they learn of his
dual functions, there are few investors who do
not immediately express the wish that they
would like to spend the rest of their lives as
specialists. Thus, on first learning of his
existence, almost the first question the
investor asks is: How do you become a
specialist? The answer is never to
encouraging: By being born the son or
daughter of a specialist.
The financial activities of specialists are
exceedingly diverse. Some operate their
businesses as individuals, others as
partnerships, corporations, or other kinds of
joint ventures. Subject to the same market
conditions or situations, they will often react in
different ways. But always, in the pursuit of
profits, the specialists have one thing in
common: They are the owners of the “Stock
Exchange”. This means they are the owners
of the institutionalized system that, more than
do stockholders, directors, or officers of the
companies under their jurisdiction, determines
the overall direction of these companies’ most
important profit making instrument, their stock
prices.
Only under the most extraordinary
circumstances would one specialist ever
impair the financial interests of another
specialist. Thus, while the specialist conducts
his affairs as he pleases, he conducts them
according to the direction of the syndicate of
which he is one of the principle members.
Published 09/09/07
Richard W. Wendling
www.bearfactsspecialistreport.com
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