The evil market makers
“The more I find out, the more I realize that I don't know what's going on."
"How fortunate that you have discovered the way of wisdom," Leto said.”
― Frank Herbert, God Emperor of Dune
Navigating the Complexity of the Trading World
In an era marked by an overwhelming influx of information and a whirlwind of global events, the financial markets have emerged as one of the most intricate and volatile landscapes. The complexities of global finance, technology-driven trading, and the interconnectedness of economies can leave even the most seasoned traders and investors grappling with a profound sense of bewilderment.
In such a bewildering environment, it's natural for individuals to seek simplicity and clarity. They yearn for narratives that promise to unravel the intricacies of the world in a straightforward, black-and-white fashion. This yearning for simplicity is where conspiracy theories come into play, offering grand tales that promise to explain it all. From the machinations of hidden elites to market manipulation schemes, these conspiratorial explanations paint a comprehensible picture in a world filled with chaos and uncertainty.
But what motivates people to embrace these conspiracy theories? Why do some individuals choose to believe that a clandestine group of malevolent actors holds the reins of their lives and the world's affairs, thereby absolving them of personal responsibility? To answer these questions, we must venture into the psychology of conspiracy theories, delving into the innate human inclination to seek refuge in simplified narratives, regardless of their plausibility.
In this post, we'll examine the allure of conspiracy theories in the context of trading and financial markets—a realm notorious for its complexity and risk. Statistics tell a sobering story, revealing that a significant proportion of traders fail to survive their first year in the market, let alone turn a profit. The psychological toll of financial losses can be overwhelming, leading some traders to seek explanations beyond their control. For them, conspiracy theories become a lifeline, offering a comforting narrative that absolves them of responsibility and externalizes the sources of their struggles.
But before we delve deeper into the psychology of conspiracy theories, let's pause to understand the often-misunderstood role of market makers in trading—the intermediaries whose activities are sometimes misconstrued as malevolent. By gaining insight into their functions, we can
better contextualize the broader discussion on conspiracy theories, trading psychology, and the pursuit of simplicity in a complex world.
Understanding the Order Book and Market Makers' Role in Liquidity
In the world of trading, the order book is a fundamental concept that underpins the functioning of financial markets. It serves as a dynamic ledger of buy and sell orders for a particular asset, such as a cryptocurrency or stock. Understanding how the order book operates can shed light on the crucial role played by market makers in providing liquidity. In short, market makers play a vital role in financial markets, acting as the middlemen between buyers and sellers.
How the Order Book Works
Imagine you're looking to buy a cryptocurrency like Bitcoin. You place a buy order at a specific price, indicating the maximum price you're willing to pay. Simultaneously, another trader places a sell order at a price they're willing to accept. These orders are recorded in the order book.
The order book essentially consists of two sides:
The Bid Side: This side displays all the buy orders from traders willing to purchase the asset at different price levels, starting with the highest bid at the top.
The Ask Side: This side lists all the sell orders from traders looking to sell the asset at various price levels, with the lowest ask at the top.
Market Makers and Order Book Liquidity
Now, here's where market makers come into play. In markets populated primarily by retail traders, the order book can sometimes appear sparse, with wide spreads between the bid and ask prices. This can create challenges for traders, as they may find it challenging to execute orders at their desired prices.
Market makers step in to "populate" the order book. They continuously provide both buy (bid) and sell (ask) orders, narrowing the spread and making the order book look fuller. By doing so, market makers ensure that there are always potential trading partners available for both buyers and sellers.
For instance, if you're a retail trader looking to buy Bitcoin, a market maker may have placed sell orders in the order book at various price levels. This allows you to execute your buy order promptly at a price close to the market rate, rather than waiting for another retail trader to match your order.
Market makers' primary job is not to steal money from retail traders by forcing them into bad trades. In fact, they help maintain an efficient and orderly market. While misunderstandings about their role can sometimes lead to misconceptions, it's important to note that reputable market makers operate within the boundaries of the law and market regulations.
Crypto's Wild West: A Different Playing Field
In traditional financial markets, as we've discussed earlier, market makers play a regulated and essential role in facilitating trades and ensuring market liquidity. The oversight by regulatory authorities helps maintain transparency and fairness. However, when it comes to the world of cryptocurrencies, the landscape can be notably different.
In the realm of cryptocurrencies, aka "Wild West" of finance, the absence of a centralized authority and the relative novelty of the market have given rise to unique challenges. While many legitimate and ethical participants operate in the crypto markets, it's true that instances of market manipulation and unethical behavior are present. Some traders have encountered and keep encountering pump-and-dump schemes, price manipulation, and fraudulent activities.
Your Responsibility
Herein lies a critical distinction: In traditional finance, where regulatory bodies closely monitor activities, you as a trader can generally expect a higher degree of market integrity. However, in crypto markets, the responsibility for navigating these uncertain waters falls more heavily on the individual trader.
In the crypto world, personal responsibility takes center stage. Every trader must take ownership of their decisions and actions. There's no room for complacency or pointing fingers when faced with market volatility or manipulation.
In the crypto world, personal responsibility isn't just a virtue—it's a survival tactic. While it's true that certain actors in the crypto markets may engage in unethical behavior, in the end, whether you make a profit or incur a loss, it is your own actions, due diligence, and decision-making that play the most significant role. So, rather than whining about market conditions, take reponsibility of your trades and results.
That said, let’s see why conspiracy theories attract us as justification and the psychology at play behind it.
The Psychology Behind Embracing Conspiracy Theories
Understanding the allure of conspiracy theories requires delving into the intricate workings of the human psyche. Psychological research has shed light on why some individuals are drawn to these narratives, even when they defy logic and evidence.
Cognitive Biases: One key factor is the presence of cognitive biases. Cognitive biases are systematic errors in thinking that affect our judgments and decisions. For instance, the confirmation bias leads people to seek out information that confirms their existing beliefs while ignoring contradictory evidence. This bias can reinforce conspiratorial beliefs as individuals selectively focus on information that supports their theories.
Need for Control: The human need for control over one's environment and life circumstances is another driving force. Conspiracies offer a semblance of control by assigning responsibility for complex events to a few individuals or groups. This can be psychologically comforting in a world filled with uncertainty.
Social Identity and Belonging: Conspiracy theories often provide a sense of belonging. Believers join a community of like-minded individuals who share their views. This social identity can be emotionally satisfying, especially when individuals feel isolated or marginalized in other aspects of their lives.
Narrative Simplicity: Human brains are wired to seek simplicity and coherence in storytelling. Conspiracy theories offer a compelling narrative structure that simplifies complex events into easily digestible stories with clear heroes and villains.
(references at the bottom)
Conclusion: Taking Charge of Your Trading Journey
As you delve into the fascinating yet challenging world of trading, remember that you're stepping into a realm where the rules may seem different, and the road can be rugged. Conspiracy theories may whisper enticing explanations, and market dynamics can sometimes appear perplexing. But here's the truth: In this journey, personal responsibility is your guiding star. You are not a victim of circumstance, nor a bystander in the face of volatility. You are the master of your own trading destiny.
Market makers, those liquidity providers, perform their vital role, and regulations help maintain order, but it is you who must navigate the twists and turns of the market terrain. Like a captain steering a ship through uncharted waters, you must be vigilant, informed, and decisive. Your due diligence, risk management, and continuous learning are the compasses that will keep you on course.
In this arena, being a trader isn't just about making profits; it's about owning your actions and their consequences. It's about embracing both the wins and losses as part of the learning process. It's about becoming not just a trader but a responsible and resilient one.
So, as you venture forth into the trading world, remember this: You are not just a passenger; you are the captain of your trading ship. Embrace that responsibility, face the challenges head-on, and chart a course toward your financial goals. In the end, it's not about whining over market conditions or seeking scapegoats; it's about taking the helm, navigating wisely, and ultimately, reaching the shores of success on your terms. Bon voyage, and may your trading journey be a rewarding one.
References:
Nickerson, R. S. (1998). Confirmation bias: A ubiquitous phenomenon in many guises. Review of General Psychology, 2(2), 175-220.
Kay, A. C., Whitson, J. A., Gaucher, D., & Galinsky, A. D. (2009). Compensatory control: Achieving order through the mind, our institutions, and the heavens. Current Directions in Psychological Science, 18(5), 264-268.
van Prooijen, J. W., Krouwel, A. P., & Pollet, T. V. (2015). Political extremism predicts belief in conspiracy theories. Social Psychological and Personality Science, 6(5), 570-578.
Gerges, F., Gray, K., & Hollingsworth, W. (2019). Incoherence between conspiracy belief and political knowledge. Social Psychological and Personality Science, 10(7), 881-890.