Through superior information, quick execution and aggressive marketing, traders and dealmakers capture a great deal of the potential increase in value created by new and anticipated corporate profits before that value is recognized in stock prices. This results in lavish compensation for traders and dealmakers and stock prices that don't rise with profits.
Instead of ordinary folks getting a decent return in their IRAs -- in line with the rise in corporate profits -- real estate prices in the Hamptons and luxury goods sales at Manhattan's finest stores soar.
Hedge funds, electronic traders, private equity and M&A shops act on information that is obtained through careful, legitimate research, with resources the ordinary investor cannot possibly compete with. Moreover, as several SEC investigations into insider trading indicate, critical competitive information is sometimes obtained through unethical and illegal means -- data pried from incautious corporate officials and through electronic espionage put opportunities for gains by individual investors and conventional mutual and pension funds at a further disadvantage.
The ordinary investor is simply outgunned. For him, stocks have become a rigged game.
Peter Morici is an economist and professor at the Smith School of Business, University of Maryland, and widely published columnist.