HOW THE MARKET REALLY WORKS

As the wingnuts are trying to praise the glories of the free market, it's nice to have a look at how the Wall Street market actually works. These excerpts are from Trading with the Enemy by Nicholas Maier.

The first tells us about how insider trading is routine on the Street (pages 89-90):

When I began doing research at Cramer & Company, I learned this firsthand. A prominent analyst invited me out to dinner, and Jim was thrilled. But before I went to the Tribeca Grill and ordered seared yellow fin tuna, I was to get another lesson from Jim.

"The reason it's good to go out with these people," Jim explained, "is that the analysts are safe to talk."

He was right. This analyst told me "sales had slumped recently" at one of the major home-goods stores, which concerned him greatly. He went on to say that his rating was currently under review. Cramer & Company shorted a hundred thousand shares of Lowes by the time the downgrade arrived a few days later.

Another time I met a Smith Barney analyst, whom I'd been talking to on the phone for a few months, at Chelsea Billiards for a game of pool. After a few beers, Joe told me that he had just visited a certain corporate headquarters and found that fundamentals at the company "appear to be turning around and the long-term prospects are improving."

"You guys have a hold rating on that stock, don't you?" I asked, sinking the six-ball in the corner pocket.

"For now," he replied, polishing off his third Heineken.

Before I could congratulate myself, the analyst set me straight "Listen, Sherlock, just remember one thing. If you're going buy it, buy it with us. We get a cut of every trade you do in stocks we cover."

So, analysts routinely provide market players with information that's not available to the public AND their firms get commissions on the deals based on this information.

Second, we have naked short selling (pages 70-71:

Jim turned toward his head trader. "Mark, sell ten thousand Bristol Myers."

"We never bought any Bristol Myers," Mark replies.

"We own the calls," Jim corrects Mark impatiently, aggravated by the delay.

Technically, by owning the calls we have the right to buy the stock but don't actually own it.

"So sell it short?" Mark asks for clarification. Mark knows that according to the SEC rule book, selling stock you don't already own (even if you do own the call options) must be marked and executed as a short sale.

"You are confusing me with someone who gives a shit. Just sell it! I said hit the fucking bid!" adds Jim, not interested in wasting time over petty semantics.

Skirting the "plus tick" rule in this case won't necessarily make us a lot of extra money, but in Jim's eyes, the rule is still an unenforceable annoyance. "And don't ever ask me that again!"

Here we learn that SEC trading rules are for suckers.