A Layman’s Explanation Of The Wall Street Rigged Casino Analogy

In a discussion the other day I was asked to elaborate on the “rigged casino” reference used when describing the stock markets for they understood the “gambling” aspect implied, yet also knew from reading myself or others, there was more too it than just that, and were trying to see past the obvious which “casino” implied, and wanted a little bit more minutia or detail to better grasp the whole “rigged” implication.

It turned into a lively sarcastic discussion I had fun with. So much so, I decided to put it all down (and elaborate a little further) into a post for those which may be in that same camp. It’s a little long, so I wrote it in conversational style as well as story based to hopefully take the lengthiness out of it. (whether I was successful is in the eyes of the beholder) I just felt it better as one long shot, rather than broken into two or three separate pieces of posts. And with the end of summer long weekend/holiday coming up on us, I thought it was as good a time as any to write it.

Just remember, I’m speaking only for myself as I see it. Also – it’s intentionally meant to be an over simplification or crude example as to demonstrate the argument for an “Ahhh, got it!” type discussion. So with that said the example went something like this:

You hear on the television, radio, or print that there’s been big gains with some never before seen larger “jackpot” happening down at the casino. (i.e., stock market) Now, curiosity has got the best of you. So, you decide to go see for yourself. Maybe, you’ve also decided to take along a good portion of any savings you might have “just in case” there is money to be made. For you’ve now caught that little scratch in the back of your mind “Hey, who knows, maybe things have changed, but I’m going to have to play to win so….” And off you go.

Let’s assume for simplicity sake that casinos are nothing new to you. You’ve been in a few and dabbled let’s say a decade ago. You know how they work where all the beautiful lights, and giveaway buffets are all paid with losers money. You remember these places almost always being full to capacity. People were laughing, eating, drinking, and all the trappings. So there you are eager to see what all the buzz is about for surely – if the jackpots have never been higher, then surely the place must be hopping.

When you arrive you notice something immediately – the parking lot built to hold thousands of cars is basically empty except for a peppering of clusters near the entrances. You also see the place has been taken over by “new management.” No longer is it the Hometown Grand Casino. It’s now: The Fed’s Lockstep Pavilion & Casino.

So now you’re in the (i.e., stock exchange) casino and it resembles little of what you once knew or thought still remained. The game tables are still there, but there’s no physical dealers any longer. Now it’s a TV screen and the dealer as well as cards are a projected image run by a computer program. (By the way – that’s not fiction. There are this very thing at many casinos today.)

Another thing you also notice immediately: there’s basically no one in the place. What’s even more discerning is, everyone that is there – is looking directly at you as all their eyes follow you to see what table or game you’re going to play at.

Many of the tables are either empty or have just one player. Let’s call these types the “institutional” players where they don’t mind if anyone sits next to them and enters the game. However, they will move from these at any time to the secluded “High stakes” (i.e., dark pools et al) areas depending on how big of a bet they want to place away from prying eyes or less adept sized or skilled players.

Then there’s the slots with all the flashing screens, lights, bells and buzzers. There sit what we’ll call the “day-trader” set. They’ll sit all day watching screens trying to figure out which machine via technical analysis and more is to “pay out” today. There seems to be more people in this area than any of the others. But, as you look further you see it’s an illusion. For if you walk around the maze of machines, you notice there’s far more empty seats not clearly visible by virtue of their arrangement.

Then there’s the craps or roulette tables. This is where the big or small player can get on what is called “a run” and others can pile on hoping to also take advantage of the winning spree. They remain closed most of the time, but when there’s a “streak” happening: it’s the center of all attention.

At times you hear bells, buzzers, hoots and hollers followed with a flurry of activity from camera crews and reporters circling around one of the games or tables dispensing minute by minute details of what just happened: “The bet (i.e. stock) just paid out!” or “What an earnings beat and guidance for an even higher payout next time! This is the game in play as of this moment! You need to be in it to win it, so buy, buy, buy!” etc., etc. Then as fast as it took place, the commotion is gone, and the media takes back to the “lounge” to await the next event to cover.

So now let’s look a little deeper into the action, as well as players, and how things appear to be working.

Let’s now say you went to observe this everyday for the last 6 months, and the one thing you can’t seem to grasp is: How can these “jackpot payouts” rise ever higher and higher when there seems to be no one in the place? Where is the money coming from to play? Let alone pay out? And here is where it begins to fall together, or too pieces, depending on your take of the whole thing.

Remember when we started? The place was said to be under “new management?” Well, with that change also came a change in rules as to play. The rules you once thought you knew which were pretty much universally known as well as understood, no longer apply in this casino. As a matter of fact, the more you think or play by so-called “fundamentally understood rules” the more of a disadvantage (or possible ruin) you’ll be at. So keep this in mind.

You finally decide after months of watching others “clean up” this is the day you’re going to put money at risk and “get back into the game.” So you decide to start out simple and hit the slots area. (i.e., your online broker of choice) You take up to a machine that seems in isolation and start playing. As you play, you begin to notice or feel that something isn’t just right. The wheels seem to not spin when you hit your button – they seem to momentarily pause first. Same goes for stopping. Just when you’re about to win, when the wheels stop, the symbol you thought was about to line up and give you a payout – disappears.

You decide to call a floor worker over to complain. (i.e., the trading support desk of most brokerages) Their answer? “That’s now part of the game. It’s part of the “liquidity” function of the machines. The machines powered via HFT programming provide the “fruit” as to play, but where or when they appear is decided by them and them only. Just because there was a fruit there when you started doesn’t mean there has to be one there when you want out.” You’re also told to remember – “that’s why the call it gambling.” (i.e., money at risk)

Infuriated you decide to move on to something different.

With the last experience still eating at you, you decide to take a break and maybe have a cocktail at the bar. While you’re there you look up and see there’s bar side betting available on the various “sporting events” playing on the screens above you. Maybe you were once an amateur statistician for baseball and such. You look up and see there’s a few bets available for near immediate payout on “top all time hitters” or, “best on base percentages” etc. (i.e., GDP reports, Employment reports, etc.)

You have a good handle of this and you believe based upon your own math and knowledge of the game you have a good chance of coming up with the right conclusion. You place your bet (i.e., market order) and wait for the results. Then – not only are you wrong: you’re not even close. As a matter of fact the names announced make absolutely no sense to you. You know their numbers intimately and accurately surmise: they can’t be right! What is happening you ask?

Welcome to “seasonally adjusted” numbers. All the statistical data you thought would be used (as in 1+1=2) has been adjusted to mean what ever the people running the game want it to be. The games you watched or went to where you saw this team or player beat or make that play – nullified. Or worse, “doubly seasonally adjusted.”

Singles are now scored as doubles, or triples. Triples are grand slams and on, and on. Loosing teams won. Winning teams won more than they even played. And – it changes not only every day or moment. History is changed also. People that were benched most of their seasons in previous years are now moved into Hall of Fame statistics. You can’t believe what you’re witnessing. Frustrated you slam your empty glass and move onto something else. Aware that every time your “bank roll” has shrunk. Not by much, but nevertheless, it’s not getting bigger, nor staying the same.

As you’re walking around looking at things shaking your head and harrumphing in an obvious manner you hear a person call out to you and gesture for you to join them at another bar for a drink. The person looks well-worn and has the aire of having been around this place for some time. It seems he’s also been watching you but his interest has moved from predatory to compassion for what ever the reason. Maybe it’s that you seem to remind them of them self years ago.

In a “take this however you want” type discussion he begins by saying, “I’ve noticed your frustration, and I just want to give you a little advice if your going to play in here for any length of time. Because, from what I’ve watched; it won’t be long before you’re not only broke – but will probably be destitute before you’ll be able to get out of here at the rate you’re going. If at all.”

Stunned you decide to listen and ask him to go on.

“One thing you need to learn is what you once understood fundamentally known as part of the game  i.e., ‘The House.’ Where they always had a statistical percentage advantage. Regardless of how many winners or losers. for as long as the place was full and people were playing, they could rely on that statistical advantage which in the end reliably ensured they would make money.

In other words statistically the house always profited by a few percent points that were mathematically calculable and was the basis for paying for much if not all of the overhead years ago. That’s now gone. Today, since the amount of players is near abysmal; the house doesn’t even care about that. They now farm all that out to the High Frequency Trading (HFT) companies, and they skim every and all transactions, big or small; and kick back a percentage of that to the house. Nothing get’s missed.

Now instead of relying on math or statistics or leaving any portion allowed to chance – it’s now a sure thing with High Frequency Trading: for HFT makes sure they get their piece of everything. Remember, when gambling’s the game – this house doesn’t like to take chances. And HFT takes no chances, it alleviates them. Otherwise; how could one boast over 1000 days of ‘playing’ with no losses? Someone lost every-time they played – but it wasn’t HFT, nor the house. Think about that long and hard.

Another point: The casino today is far too concerned with appearances. You can’t have people crying or players belly-aching to the media. You have to keep up appearances, continually, non-stop, 24/7. And one way to do that is to have ever higher, and more tantalizing headlines of an ever-increasing jackpot. And this is easy to do; even with a diminishing amount of not only players, but also the money available to play within. For like I also alluded earlier: The rules you thought applied are no longer relevant here. Take this for an example..

There are 10 players over there, each playing their own hands of blackjack. Suddenly there will be a commotion of hoots and hollers coming from a craps table. One player seems to suddenly have the winning touch. To this new-found excitement all those former blackjack players will leave their tables and pile onto the craps table. They’ll add what will be exponential amounts to the previous bets on the table. And: When a hit, hits – the pay off within that singular environment is and will be exponential.

Yet, there’s been no ‘new’ money played or coming in from the main entrance. No addition of players within the room. As a matter of fact, the amount of total participants may have actually fell. However, that’s not what you’ll see when the camera crews and reporters gather. It will seem to anyone outside these walls as ‘smiling faces singing happy days are here again with over-sized jackpot payouts.’

Remember: All that happened were the 10 players that moved from one game – to concentrate in the other. For that was – where the action is. And they’ll move back to their previous game as soon as the ‘roll’ stops. They don’t like to play continuous rounds – they only like to hitch their wagons as quickly as possible and ‘go along for the ride.’ And as soon as it’s over – they’re gone.

But let’s not forget the original player or winner. They’ll probably say there ‘reinvesting’ all their winnings till – they’re broke. They don’t want to stop. They always think the next ‘payout’ is just around the corner, and they swear they can feel it.

But how to continue if you’re broke? In a casino a decade ago you were quietly shuffled out the exit. Today, they try to let no one leave because there’s too few here today already. So what is the house (Fed.) to do? Easy – finance them to continue playing in ways one never thought possible only a few years ago.”

But how does that work out you ask? It makes absolutely no sense. At some-point you’re going to need people with real money to spend to come in don’t you? You can’t finance the losers and expect to attract winners? It’s nonsensical!

The gentleman agrees with you, but is quick to make his point as to not be lost on you. He states:

“The problem you have is you believe the ‘house’ knows what it’s doing. It doesn’t.”

‘It believes a strategy of doing the nonsensical, makes absolute sense. They’re stuck in a misguided, or even less than understood chicken or egg quandary. They may own a casino – but they’ve never gambled. Not only that, they’ve never stepped foot in one. Their only knowledge of what they believe transpires in a casino is what they’ve read in books by others that have also – never been inside or played at a table. Yet, they believe, it is they that understand. And it is you, or I, that don’t.

This is why nothing makes sense to you. Because; all the rules have been changed to adapt to nonsensical ideas or interventions into the game. And the only reason why it’s still going on as long as it has is; they own not only the money, but the chips also. If you can print up money as to buy ‘chips’ whenever you need to keep the house running – it can go on indefinitely until the jig is up via a fall in public confidence.”

With your head spinning you ask, “I don’t understand one thing. How is it I see reports that there’s the same if not more hands (trades) being played at any time. Yet, there’s basically no one in here? That, and the fact of since I’ve been here today, I haven’t seen one new person come into this place. Where is the money to be played coming from? Someone has to be losing. They can’t stay in here forever without new money. I just don’t get it.”

“It’s easy” he replies. “You just have to understand the way everything works today – not the way it worked yesterday. And this is why you’re having trouble. Let me explain…”

“To play here all you need are chips. And just like the Fed., the casino can print as many as it wants or needs. And with the Fed. now hitched to the casino – there’s no need for concern in how many chips are created ex nihilo.

In the old days when you cashed your chips the house needed to have the equivalent in cash-on-hand so you could cash out and leave. If they only had say $1MM cash, they could only cash out $1MM worth of chips. So there was strict adherence and attention paid to balance sheets.

Today, what does it matter? Payout a jackpot for more than you had?  Make more, and print more to cover it. Same goes the other way, Need more to loan? Create more and print more to cover that also. Remember, if you’re in charge of ‘the money’ you’re also in charge of the chips. And the fine act of balancing the books is rendered moot. Questioning of the house and its solvency is scorned as irrelevant by this one point. So naysayers are always written off as Chicken Little’s by the press or anyone else wanting the game to go on indefinitely. It’s quite the ‘edge’ when you think about it in these terms, no?

As for the amount of bets (i.e., trades) taking place? Today, that one player, at that one table, will play more hands and deal more cards between themselves and the electronic dealer than what once took a roomful of physical people. The cards are being dealt so fast you can’t even see them, only they can, let alone you trying to comprehend what hand is being held at any one time, and every one is counted tabulated and reported. That’s how specialized of a player and dealer most of these tables have become. People still assume it’s a mass of people exchanging those cards, but in reality – it’s only a few.

Sure, they’ll let you sit in and play if you dare. Matter of fact they even encourage it. However, one thing you’ll notice right off the top – you’ll lose a minuscule portion of what ever you have on the table every-time there’s a movement. This is called the HFT vig. Every time you go to play – you pay for it one way or another. Also: The ‘pro’ player is allowed to have two distinct advantages that you don’t.

One: It is perfectly acceptable for them to see your card before you get it. And second: If they know your hand is going to beat their hand – they can pull the deck and fold entirely leaving you stuck with a hand that’s now irrelevant and no way to cash in or out. That’s why you pretty much never see anyone other than one at a table. Once you know that rule – you really want to belly up there and join in?”

“But doesn’t anyone ever lose?” you ask. “I mean, someone has to lose right?”

“Oh yes!” he replies. “Basically everyone loses one way or another at some time. Even the casino. Sometimes in spectacular ways! However, that doesn’t necessarily mean they can’t continue or no longer play. Right now they can always get credit to keep the games as well as the players going. And for some, the credit seems unlimited. And this is where the house thinks it’s playing with genius fueled insights. However, it’s a suckers bet and they aren’t even aware of just how bad it’ll probably end in tears.

You see, if one of those ‘pro’ type players loses, all they need to do is bring some collateral over to the ‘window’ and they can get more chips to either continue or re-enter the game. And when I say collateral I use the term loosely, and here’s why.

In the old day’s you could always get collateral with a gold watch or legitimate piece of jewelry. Maybe even the right car or even a house. You’d get a percentage, a very low percentage I’ll add of what it was worth, and it was limited to only a very few select items. But it was an option.

Today? You can basically take garbage over to the ‘window,’ declare it has a value of what ever you want, and they’ll give you your full asking price in new chips.

You should see the stuff they’ve taken in and have out in the holding area. There are mountains of green garbage bags full of old ripped, dirty, worn clothes taken as collateral under the argument they’re not rags in trash bags. Rather, they’re high-end designer luggage and apparel! Everyone knows its garbage – but no one cares. Paint by number paintings are said to be ‘Early aged previously unknown Picasso’s, Renoir’s, and more.’ And – if you try to point it out? You’re told to mind your own business. So…it goes on unabated.

Remember just like the Fed. – the casino supplies more and more chips if needed because, again, just like the Fed. – they can create them from thin air. All that’s needed to continue playing if the odds go against, or a margin call is required from one of them is reminiscent of an old Bond film when the pit boss is asked ‘is his credit good?’ and that a nod comes. And if you’re on the special V.I.P. list with the dealers – the nod surely comes. For now at least.

And here is where an answer to your question of ‘Where does the new money to continue come from to push the jackpots ever higher?’ gets addressed. It ‘appears’ like there are always new money or ‘new’ players pushing the jackpots ever higher. That’s an illusion also. Here’s an example…

Think of the ‘jackpot’ or ‘games’ as companies. Basically what’s transpiring today, ‘the markets,’ where before $1 Billion was proportionately invested across many companies making up an index which may have moved the needle incrementally. Today that $1 Billion is directed directly to near exclusivity into just one of the higher weighted companies (say Apple™ for example) which then pushes that entire index as well as all the other ancillary connections higher, as well as quicker. Levitating the entire index itself ever and ever higher. However, like I said before ‘it’s an illusion.’ It looks like people are throwing money into all the companies involved. But they aren’t. Just the one or a few main players.

And just like our casino analogy, the money needn’t be or was not ‘new.’ Maybe that billion originally came out of all those companies at first proportionally within that very same index. Then, because it was now channeled and focused into the singular ‘market moving’ vehicle of choice – the illusion of ‘everyone’s making a killing’ is fulfilled via the art of smoke and mirrors. This is the ‘market’ we find ourselves in today. No real appreciable growth overall – just the illusion of it. There’s no end to the slight of hand found throughout this place. It’s mindbogglingly when you get right down to it. There’s so much it’s hard to comprehend it all. Let alone explain.”

Doesn’t anyone wonder, or ask how? Is everyone in here stupid?

“Oh no. Many of the people here are very smart. Just delusional because they believe they’re smarter than the other guy. Most think when it’s time to get out – they’ll be able to get ahead of the others. That’s the delusional aspect. And the reason why they don’t question it is: anytime they seem to worry and ask too many questions or dare decide to start cashing in chips en masse – they send out one of the managers from the ‘window’ and open the bar with free drinks and give pep talks on how great everything is, then break out into everyone singing “everything is awesome” and how it will always remain. All while adding if there was ever any reason for concern – they were there to ‘do what ever it took’ to make sure the players and their chips were safe. The tension usually quells pretty fast after that and it’s back to ‘business as usual’ like it never happened. It’s really breathtaking to see in action in my view.

Again, the only thing that is keeping this house of cards together: is an illusion. What is currently residing within this casino (market) structure is nothing more than the movement or funneling of the residual force, further contracting, or consolidating into fewer and fewer avenues (or games) desperately searching for the possibility of any pay out. Regardless of how little.

This is how you can have the appearance of an ever advancing market while appearing like you have a great many active players, make headlines and taglines for the assorted media channels to hopefully keep up the appearance that ‘this place is hopping!’ Yet, most of it is only made possible via just a mere handful of jackpot winnings (i.e., stocks.)

Which brings us all back to why when you probably entered the parking lot you wondered how seeing such dismal activity, as well as an outright near disdain when you told anyone who knew of this place you were coming here. How could such talk or headlines in general remain mirroring ‘Jackpots still within spitting distance of their all time highs. With even greater prizes to be had even sooner!’

It doesn’t make sense to you. And it shouldn’t to anyone. Unless – they first go directly to the ‘house bar and media entertainment center’ that is always open and always free with spiked Kool-Aid™. It works better and is cheaper than actual liquor. It’s not actually a drink per se. It’s just hoopla and endless propaganda for the masses. That’s why it’s free and encouraged. It keeps everyone happy within the walls and enhances the experience, while simultaneously acting as one non-stop running commercial to entice anyone foolish to think they too can get rich quick. All legal by the way. The laws were adapted to fit the criteria.

There’s a great deal more, but I imagine you get the gist of it all now. So with your new-found insight – do you want to still stay and play?”

No, but I do have one last question: Why are you here? Or, why do you stay?

“Oh, that’s simple enough. You see, I’m just sitting and waiting till the day it all falls apart. And that’s coming sooner now than later. I’ve been watching for signs of stress in the facade and they’re happening with far more rapidity and severity than ever before. And once the realization sets in that ‘there’s no more music” and everyone begins racing for the doors? I want to be the first in line to buy this place with all its contents for probably less than zero. I’ll garner not only will I buy this place. They may offer to pay me to take it off their hands.

Then I can get down to rebuilding it into a proper business that makes money the old-fashioned way. By earning it via trust, and equitable jackpots with understandable odds and above the board rules. Until that time, I’m just going to sit back and see how it all plays out because no matter what – it’ll be history in the making that will go down for the ages.

And I’ve got a front row seat.”

© 2015 Mark St.Cyr