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BookingAlpha Option Trading Advisory

Saturday, November 19, 2011

Market Manipulation by Smart Money. Really? I mean...REALLY?

It's been a while since I came to the conclusion that this crazy game is a negative sum game rather than a zero sum game. So, probabilities are aligned against you right from the beginning. Another common conception out there is that the smart money always wins. Also known as: They manipulate the markets in their favor and get the money of millions of small retail traders. Let me disagree with this statement with some common sense first and then with some numbers.

First, it is true that huge funds can move the markets given their huge transactions, but this is not entirely good for them. Let's say a fund wants to liquidate an enormous position on a specific stock they own. If they were to sell all the shares, the huge selling pressure starts to bring the shares value down, so after the first sells, the remaining shares they have are worth less due to the same selling pressure their own action has caused. So it is not always a good thing to move the market with any of your actions.

Second, huge funds are like big elephants trying to get out at the same time through the same tiny door. When there is a panic and people have to sell, you can liquidate your 10 shares of McDonald immediately. But for all funds to liquidate their millions of shares completely, it is just impossible. They would be in that same situation of being too big to get out a tiny door. Also if they liquidate all at once, they just hammer themselves in the hole by destroying their own shares values.

It is true they have advantages. Like favorable commissions due to their trading volumes. More access to news services and supposedly top notch market information sources. Plus when buying, they definitely do push prices up on the same instrument their are buying but again this is a double edge sword, as they cant get in entirely at the low price because their own action caused stocks to move up so consequently they need to pay for higher share prices when making up a big position.

It is known that just like in the retail world, where 90% of traders lose money, in the supposedly smart money realm, 80% to 90% of money managers fail to beat the S&P 500 year after year. Heck! Most money managers would give their first male child if they could just beat the S&P 500 by +1% every year.

And finally, The ice on the cake. The numbers don't lie. Bellow I have extracted the performances of Mutual Funds managed by the Royal Bank of Canada. This is information publicly available that you can find at I removed the funds based on fixed income strategies, a.k.a those who buy debt. Due to their nature those are very low risk in exchange for small but steady returns. I am just leaving the mutual funds that go to the trenches, the ones printing the sand with their blood in the markets day in and day out. Have fun with this! The red rectangles were added by me in order to highlight the performances year to date. A.k.a, how they have done this year.
(Click on Images to enlarge)

Impressive huh? How many haven't lost? Geezzz I don't even want to count them, it's humiliating. The S&P 500 opened the year at 1271.89 ( and as of yesterday November 18 it was at 1215.65. That is down 4.4% for the year and yet most mutual funds are under performing that number. This is not only the RBC, you can find mutual funds' performances all over the internet. It is publicly available and free information. Here are a couple more:

- TD Canada Trust Mutual Funds at

- BMO Mutual Funds at,4695,35649_23751598_0_3,00.html

In the end who's making the bucks then? Well, that's a long list: Brokers, Market Makers, Inside traders, Banks (charging transaction fees when people move money from institution to institution, or when people are forced to exchange currencies), Sales people and newsletter marketers and online Gurus selling courses. Sure there are traders making money, there are some funds also in positive territory. But don't be a fool! Most mutual funds are losing their asses!!!! The smart money is not that smart in the end.

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