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Crapshoot Investing: How Tech-Savvy Traders and Clueless Regulators Turned the Stock Market into a Casino [Hardcover]

Jim McTague

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Book Description

March 1 2011

In just the past few years, the equity markets have been transformed into a high-speed casino that’s a pure crapshoot: a white-knuckle rollercoaster ride that has left individual investors legitimately terrified of equities. The Flash Crash of May 6, 2010–when the DJIA plummeted 734 points in 17 minutes, and dozens of top companies traded as low as zero–was just a harbinger of disasters to come. In Crap Shoot Investing, Barron’s Washington Editor Jim McTague reveals the twin causes of this massive transformation: high-frequency traders using mathematical hocus pocus, and blundering regulators whose attempts to promote long-term investment have massively backfired. McTague takes you through the Flash Crash moment by moment, revealing what happened and how it happened. Next, he burrows “under the volcano” to uncover the titanic, uncontrolled forces now at work in equity markets, showing investors exactly what they’re jumping into when they buy and sell stock today. You’ll learn how new exchanges, desperate for cash, are attracting high-frequency traders at everyone else’s expense… how “dark pools” of hidden trades are tilting the playing field…how even small investors are promoting dangerous volatility. McTague explains why regulators continue to ignore the big picture as the markets accelerate towards chaos. Last but not least, he presents a rational strategy for investors who need to get ahead in markets that have become riskier than most casinos.

 

"A valuable read for anyone considering investing in equity markets."

Reprinted with permission from CHOICE http://www.cro2.org, copyright by the American Library Association.


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Review

 

From the Back Cover

“The government’s master planners have done it again! Usurping the role of ‘invisible hand,’ they have inadvertently destabilized the stock market and frightened off long-term investors. McTague sardonically chronicles how this happened and the new dangers the meddling has created for the investing public.”

Larry Kudlow, Host, The Kudlow Report, CNBC

 

“Jim McTague is the best, because he refuses to report like the rest. He was the first to report in the dot-com boom that earnings should matter, and in the real estate boom, that simple math matters. Some might call that being the skunk at the picnic. Pity we don’t have more skunks.”

Neil Cavuto, Host, Your World with Neil Cavuto, Fox News Channel

 

“Jim McTague presents a ferocious verdict on the state of the markets after the Flash Crash of 2010. It takes a strong mind to read the anecdotes and reporting in Crapshoot Investing and not break down laughing. Cash under the mattress or in a coffee can? Far more secure than the ticker tape.”

John Batchelor, Host, The John Batchelor Show, WABC Radio Network

 

“This fascinating and compelling book is a must-read for anyone that invests in the stock market. Jim McTague pulls no punches in telling the alarming story of how these markets have been transformed into risky casinos. If you plan to be one of the winners, this is a book for you.”

James R. Barth, Lowder Eminent Scholar in Finance, Auburn University

 

“This book is like a fast, furious, and sometimes airborne motorcycle ride. It hurtles along, avoiding the obstacles that lie in the path of investors, devilishly constructed by Wall Street and haplessly beyond the ken of the regulators. It is not a book that makes you feel good about your 401K, but you will laugh aloud often.

Llewellyn King, Host, White House Chronicle, PBS

 

“McTague’s book is an indispensible read for everyone interested in the problems and benefits of replacing human traders with algorithmic machines in one of the most important markets in the world. The equity markets play a central role in the allocation of scarce resources to many of the most productive enterprises that provide jobs for workers, and goods and services for consumers. Short-term retail investors should also consider Jim McTague’s advice: ‘It has become a shark tank and we are the anchovies.’”

Robert Auerbach, Professor of Public Affairs, The Lyndon Baines Johnson School of Public Affairs, The University of Texas at Austin

 

The equity markets are now nothing more than high-speed casinos: white-knuckle rollercoaster rides that have left individual investors legitimately terrified of equities. The Flash Crash of May 6, 2010—when the DJIA plummeted 734 points in 17 minutes and dozens of top companies traded as low as zero—was just a harbinger of even greater disasters.

 

In Crapshoot Investing, Jim McTague, Barron’s Washington Editor, reveals the twin causes of this massive transformation: high-frequency traders using mathematical hocus pocus and blundering regulators whose new rules have massively backfired.

 

McTague takes you through the Flash Crash moment by moment, revealing what happened and how it happened. Next, he burrows “under the volcano” to uncover the titanic, uncontrolled forces at work in equity markets, showing you exactly what you’re up against when you trade stock. Last but not least, he presents a rational strategy for investors who need to get ahead in markets that have become riskier than most casinos!

  • Bi-polar markets: from mania to depression in an instant
    The massive new forces pumping new volatility into the markets
  • How markets are selling unfair advantages—at your expense
    How some traders buy privileged access—and tilt the markets against you
  • The new SEC rules that helped destroy the markets
    …and what must be done to fix them
  • How to invest successfully in a shark-infested market
    A disciplined new approach to long-term investing: today’s only route to success

Customer Reviews

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Most Helpful Customer Reviews on Amazon.com (beta)
Amazon.com: 4.0 out of 5 stars  21 reviews
15 of 19 people found the following review helpful
5.0 out of 5 stars Crapshoot Investing is a Gem March 16 2011
By Tibor E. Frekko - Published on Amazon.com
Format:Hardcover|Verified Purchase
When Dorothy Parker uttered her famous declamation "What Fresh Hell Is This" just a few miles from the epicenter of all Capitalism, Wall Street, few knew the gods of The Street were paying rapt attention. While the iconic Parker was not referring to the market, they knew a good line when they heard one, and have been busy ever since heaping "Fresh Hell" on the investing public.

In his brilliant new book, Crapshoot Investing, James Mctague, the Washington Editor of Barron's, chronicles the effects of High Frequency Trading (HFT) from the crash of October 1987 to the more recent Flash Crash. Despite it's eye catching name, this is a serious book about a serious subject by a serious author. McTague is gifted in being able to write in a clear, concise and easy to read manner that propels the reader forward to the end without losing any of the original enthusiasm.

Due to high technology of super heated computers, collocation, and amazing algorithmic programs, information can be gathered, stocks bought and then sold all in a matter of seconds to milliseconds resulting in profits of a tenth of a cent to a cent per share traded. This seems pretty tame until one realizes some nine billion shares are traded daily and the yearly take is between two and twenty billion dollars.

Dark Pools and other esoteric vehicles of trading are exposed and brought to light. Government regulators are not spared. Hamlet had it right. "Something is rotten in ...". Supply your own term.

So what's a po' boy (girl) to do? One could do nothing, soldier on and hope a Bill O'Reilly type is looking out for the folks. Then there is the mattresss strategy so favored by Granny. One could sell it all, spend it all and let the Devil take tomorrow. But the one that makes best sense is to read and reread the last chapter where the author offers his advice on how you can keep the playing field more level.

Run, do not walk to your nearest bookstore or go on line to pick up your copy. Better yet, take advantage of this superheated technology and download a copy on your IPad or Kindle or other device and begin to read it immediately.
3 of 3 people found the following review helpful
5.0 out of 5 stars Has High Frequency trading transformed the Stock Market? June 15 2011
By Steve Burns - Published on Amazon.com
Format:Hardcover|Vine Customer Review of Free Product
This book needed to be written. While its main focus is whether or not high frequency traders caused the flash crash on May 6th, 2010, it goes much deeper than that.

It discusses many areas that have changed in the market over the past decade that I have not seen addressed in any main stream book.

Did the high frequency traders that were plugged directly into the exchanges computers cause the flash crash? Was it a mismanagement of an algorithm or something more systemic? One theory is that much of the trading volume today is simply high frequency traders scalping the market back and forth over and over. Once they step aside and do not buy the big sell orders come in and drive prices down dramatically. The big sellers misunderstood the volume and liquidity in the market and inadvertently crashed prices when all the volume disappeared or went short as a big order hit the book.

Many people that the author quotes in the book believe that regulators in their attempt to make the markets more fair for the retail public threw them out of balance. By draining away volume from the main exchanges and spreading it across many for the sake of the best prices, it unbalanced the market and made it hard to put in place circuit breakers in the midst of a crash. The regulators ran many market makers out of business by changing from fractions to decimals and replaced most of them with machines.

The book was very interesting showing how high frequency traders trade with no regard to the underlying businesses of stocks, trading them like chips on a roulette table, they simply game the stock for penny gains all day by programming computers with the odds of successful trades and front running orders by mutual funds and bigger money managers.

After twelve years of trading I have noticed changes in how the market performs and this book may explain a lot of the strange behavior where stocks become completely removed from any underlying business value or start an uptrend for no rational fundamental reason. Very interesting, informative, and enlightening book. I highly recommend.
3 of 3 people found the following review helpful
5.0 out of 5 stars Required Reading for All Investors May 14 2011
By W. D. Barnum - Published on Amazon.com
Format:Hardcover|Vine Customer Review of Free Product
The stock markets have changed, and not for the better, as far as the individual investor is concerned.

This book does an excellent job of explaining the "flash crash" and the major changes in the stock markets that made it not only possible, but likely.

Although I have an undergraduate degree in Finance, and an MBA, I feel this book was written in such a way as to be easily understood by most investors.

The author points out the failures of the SEC, as well as the advantages possessed by the High Frequency Traders and other players in today's market.

The author also supports the return of the "Uptick Rule", which I also support.

The author at the end of the book, does show there is some light at the end of the tunnel for the individual investor - if he takes a long term approach, does his research, and purchases stocks properly.
1 of 1 people found the following review helpful
5.0 out of 5 stars Excellent reporting - but 'crapshoot' is the wrong word June 8 2011
By Doctor.Generosity - Published on Amazon.com
Format:Hardcover|Vine Customer Review of Free Product
As an avid trader for the past 20 years, I can affirm that the stock market has become a treacherous place for the small individual investor, more so every day. There was a time when the other investors with whom one competed to spot the good deals were humans. Now they are computers, and they think a lot faster than you do. This very interesting book by Jim McTague, a Barron's editor, contains excellent investigative reporting of a few key developments by entities such as so-called 'high frequency traders.' This is a system, based on connecting a computer to the market, which jumps into the buy-sell process at a low level and observes your bid. It then buys and resells the stock to you at a slightly higher price than you would have paid otherwise. There is no risk; this is not investing but hacking the market, and should be illegal. McTague shows how incompetent regulation by government agencies in the hip pocket of the brokers has failed to protect the public from what are actually borderline scams and unfair manipulations. He then goes in detail into the so-called 'flash crash' of May, 2010 and traces it to global instabilities in the market caused by computer trading. This is scarey stuff and should indeed frighten the retail investor. Going into the financial markets without your own computational resources is like a medieval knight without steel armor - not a chance.

However, the book is oddly titled because what it proves is precisely that the market is not a 'crapshoot' at all. It's a rational, failsafe system by major brokerages and hedge funds with powerful tools to take your money from you by maintaining a digital edge you cannot hope to equal - there is nothing random about it. Using short term strategies, individuals are now pretty much guaranteed to lose to more sophisticated players over time. Yes, there are some things the little guy can still do successfully, such as anticipate that a certain company will do well over the next decade, and buy and hold. Sticking to the longer term is where humans still have an edge over machines. Even then, the computer traders will be able to divert some of your profits to themselves by overcharging you for your trades. The book is discouraging but well worth reading if you want to know how the stock market really works. Recommended.
1 of 1 people found the following review helpful
5.0 out of 5 stars Must read for every investor, especially for those who invest into mutual funds. May 20 2011
By Stream Ripper - Published on Amazon.com
Format:Hardcover
Very interesting books explaining what high-frequency trading is, why the markets became so volatile, why prices of 1,500 largest capitalization stocks do not reflect their fundamentals.

The book is probably more important for those who invest into mutual funds. It explains why high-frequency traders make you pay more.

At the end of the book you may find some investements tips. They are probably not as good as something you can get from Jim Cramer, but still worth reading.

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