Your Revenge on the ‘Big Money’ Can Start Today
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It’s a phrase that pops up often in investing, and it’s older than you may think: Journalist Rudyard Kipling noted in 1891 how saloon owners would provide a “free lunch” to lure customers in as long as they bought at least one drink. The catch was that the free items on the menu just so happened to be salty foods (ham, cheese, and salted crackers), which would lead to patrons buying a lot of beer.
Milton Friedman, who won the 1976 Nobel Memorial Prize in Economic Sciences, even paraphrased the maxim in the title of one of his books, “There’s No Such Thing as a Free Lunch.”
It’s a folksy way of saying that even if something appears to be free, it never really is; there is always a cost to pay.
To see that free lunch concept in investing, we don’t have to look any further than Robinhood Markets Inc. (HOOD).
Robinhood founders Vladimir Tenev and Baiju Bhatt met at Stanford as roommates, decided to go to New York after graduation, and built two companies that sold trading software to hedge funds.
The duo then decided to start a new endeavor with the mission of removing barriers for retail investors to take more control of their financial futures through commission-free trading.
On the surface, that sounds like a nice, free lunch.
But as you may have already guessed, though Robinhood declares that your trades are commission free, you are still “paying” for those trades in a way that most people don’t realize.
“In the case of commission-free trading, you pay with the information that your order gives,” said Quantum Edge Pro Editor Jason Bodner.
To understand how this works and how someone else is gaining an edge from this information, all you have to do is look at the bellwether hedge fund Citadel, which was ranked on Dec. 7, 2022, by Visual Capitalist as the world’s fifth-largest hedge fund by assets under management.
Here’s more from Jason:
Citadel — and its record year — perfectly illustrates the successes we’re seeing from investors capitalizing on algorithmic trading. There are hundreds of funds just like Citadel collectively managing hundreds of billions of dollars.
These “algos” — as they’re known in the parlance of the Wall Street — trade like crazy when volumes are thin because they specifically profit off that bid-ask spread: the difference between what you have to pay for a stock to buy it and what you’ll receive if you sell it.
And they do this by knowing what you are going to do before you do it.
Operators like Citadel and its Wall Street brethren buy that order-flow info. They can see your order to buy or sell a stock, and within nanoseconds they can rush in front of your order, buy the stock, and sell it back to you slightly higher.
They do this all day long, with no human interaction, and it is fully legal. These algorithms are so fast that one second is like a full trading day.
These “algos” — as they’re known in the parlance of the Wall Street — trade like crazy when volumes are thin because they specifically profit off that bid-ask spread: the difference between what you have to pay for a stock to buy it and what you’ll receive if you sell it.
And they do this by knowing what you are going to do before you do it.
Operators like Citadel and its Wall Street brethren buy that order-flow info. They can see your order to buy or sell a stock, and within nanoseconds they can rush in front of your order, buy the stock, and sell it back to you slightly higher.
They do this all day long, with no human interaction, and it is fully legal. These algorithms are so fast that one second is like a full trading day.
It’s frustrating, and there’s not much most investors can do about it.
But with Quantum Edge Pro, Jason helps his members exact their own measure of revenge through his Quantum Edge system, which zeros in on the stocks big institutions are buying — even when those often shadowy players are doing all they can to keep their actions quiet.
While no one can rush to the front and buy before the hedge funds do, you can get in early enough to ride the momentum higher.
Jason goes over his moneymaking playbook for the year ahead — and much more — in his full 2023 investing outlook, which you have free access to here.