Why Rigged Financial Markets Won’t Hurt Smart Investors

The business press has been full of news of rigged financial markets the past couple of years. In 2012 came word that dozens of bankers were involved in a scheme to manipulate the London Interbank Offered Rate, or Libor, a global benchmark for more than $300 trillion of financial products, such as mortgages and car loans.

“Make no mistake,” a senior Justice Department official said. “The manipulation of Libor was about getting rich.”

The same, sadly, can be said about the manipulation in a lot of other corners of the financial world. In April of last year came word that bankers were manipulating the market for interest rate swaps, where companies and pension funds hedge interest rate risk.

Later in 2013 Bloomberg broke the story that traders were rigging the the currency exchange market—the world’s biggest—as well.

In metals markets, reports surfaced early this year that gold prices had been manipulated for a decade. This week came a class action suit alleging that Deutsche Bank and HSBC have been fixing the price of silver, too.

In the penny stock world, long a bastion for manipulators, a crackdown appears to be underway. One sign of how disconnected from reality prices there can become: a Belize-based outfit named Cynk with no assets, no revenues and no profits that was briefly pumped up to $6 billion in market value.

Last week I also wrote a brief story about how a Citibank unit named LavaFlow settled a case in which the Securities and Exchange Commission accused it of allowing an affiliate to access confidential client data and front-run their orders. LavaFlow agreed to pay $5 million without admitting or denying wrongdoing. That case was one of several that have come to light in recent months about trading venues run—and rigged—by large financial institutions.

If the financial crisis didn’t destroy the last shreds of faith that mom and pop investors had in Wall Street, this unseemly string of post-crisis scandals may well do the trick.

For smart investors, however, they should hardly matter. That’s because investors—as opposed to speculators—are people serious about building wealth for themselves over time. They’re not buying silver futures, foreign currencies or Belize-based penny stocks. They’re buying quality assets and holding onto them for years or decades. It’s like Warren Buffett said of Berkshire Hathaway, his wealth-building colossus: “Our favorite holding period is forever."

Stick to that philosophy and you will likely get rich slowly over time, thanks to the fact that markets tend to march higher over time and the magic of compounding. Trade in and out of exotic products instead, and it’s your broker and the market manipulators who will be richer for it.

Neil Weinberg is a reporter at Bloomberg.

Follow me on Twitter @neilaweinberg

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Photo: Bloomberg