Why does Wall Street like being in the news? Wall Street thrives on commotion. The more turmoil it can stir up or have stirred up on its behalf, the better.
When cable news, the internet, social media and talking heads across all platforms generate hype, buzz and chaos, this benefits Wall Street. As investors feed off this energy – positive or negative – they respond with frenzied trading in the markets. And the more trading occurs, the more money Wall Street makes. This dynamic was on full display during the pandemic when billions of dollars in stimulus money flooded the markets.
In 2020 and 2021, newbie investors armed with billions of dollars and time on their hands flooded the stock market to try their hand at day trading and make some money. This generation also used social media, online news and discussion forums like Reddit and cable news for trading cues and inspiration. As a result, there was a booming bear market. The stock market reached record highs in 2021. Wall Street firms made record profits.
Trading feeds the beast.
High Frequency Traders (HFTs) like Virtu Financial and market makers like Citadel thrive on chaos and volatility. This is because chaos and volatility lead to more trading, resulting in higher profits. These traders work behind the scenes, bundling retail trades from platforms like Robinhood. They make high volume trades, profiting from instant arbitrage opportunities. The work of these high frequency traders used to be done on trading floors. Now, it is all handled by computers running advanced algorithms.
During the pandemic, millions of inexperienced retail traders entered the market for the first time. They traded stocks wildly, without considering spreads, prices, timing, routing, econometrics or fundamentals. This was ideal for HFTs.
HFTs like Virtu feast on volatility and the predictable mistakes of amateur traders. The pandemic provided them both in abundance. This continued even during the 2022 stock decline when stimulus money dried up. Many newbie traders panicked and sold out as inflation erased their buying power.
Wall Street thrives on chaos and money changing hands.
When trading slows, so do the profits of high frequency traders. This is why HFTs benefit from keeping Wall Street in the news and on people’s minds. The more investors trade actively, the more money Wall Street players make.
Smart ultra-high-net-worth investors (UHNWIs) have no interest in feeding this machine. They are not traders. To them, trading is gambling – buying a stock hoping a greater fool will buy it later. This rarely goes their way. Stock prices move unpredictably based on too many unknowns for smart investors’ comfort. During the pandemic, any rumor could inexplicably swing a stock. Irrational stock traders make the market too risky for UHNWIs to trust their wealth to.
Sophisticated investors prefer investing over trading. Trading is akin to gambling, while investing is more fundamentally sound. Investing involves expending money to achieve a profit by putting it into financial assets, property, or business ventures. Trading does not fit this definition, but two assets do: commercial real estate (CRE) and in private companies (private equity or PE).
UHNWIs prefer CRE and PE because they are buy-and-hold investments. Investing in them is not trading, so success is unaffected by market volatility stirred up by media. Nor is success impacted by geopolitical events, social media, economic indicators, or disasters.
UHNWIs don’t trust their wealth to third parties with misaligned interests who profit from confusion and chaos. They prefer to invest in passive opportunities in CRE and PE where decision makers are transparent and paid only if investors profit. This success-based compensation keeps management honest. That is why UHNWIs prefer CRE and PE over stocks.
Kyle Jones is a co-founder and Key Principal of TruePoint Capital, LLC. Kyle is responsible for the company’s strategic planning, investment decisions, asset management, and overseeing all aspects of the company’s financial activities, operations, and investor relations.
Kyle obtained a Bachelor of Science degree from Texas State University – San Marcos, where he also played Division 1 Baseball.
