"You know what the news is-- in a minute, you're going to hear the rest of the story"- Paul Harvey

I am reading several books right now. The one that currently has my interest is "The Snowman", a book written on Warren Buffett, with the help of Warren Buffett.

In the book, Buffett talks about his days as a stockbroker, and how the many conflicts of interests (them versus us) really soured his view on the industry. In particular, Buffett points out how brokerage firms become market makers and trade for profit against the client.

For example. We know someone pays a commission when you trade a stock, but if the firm is also a market maker in the security, some big money can be made for the firm on the spread. The difference in price a firm pays for a stock, and the price an investors pays can either be narrow or huge.

This got me thinking.

After reading several books on the subject, and talking with my friends in the industry, I finally figured out how Wall Street can give away such big bonuses, and make such exorbitant profits during bull markets.

As Wall Street firms moved from being brokers to trade against the investor for their own accounts, I learned something about the system.

In the book, "Wall Street Meat", written by Andy Kessler, the book reveals how much influence Wall Street firms have with how much news influence (positive as well as negative) they have with the media. They can put out positive and negative news (true or not) which eventually influences investor sentiment and behavior.

Why do they do this? To make a profit, a huge profit.

So, if a Wall Street brokerage firm has the ability to influence investor sentiment and behavior, while at the same time trade against the investor for their own account, don't you think there is a built in profit potential here?

Let take the above example and apply it to today's market.

In today's "Daily Report" from Bill Cara, Bill in his CTAB trader "Commentary" honestly lays out how the Wall Street Gang plays the game;

Just like a big ocean liner, the stock market needs time to change directions, to transition from obvious Bear to obvious Bull. Large syndicates or pools of money need time to accumulate positions, their lines so immense that multiple brokers are used to complete the order, and many sell-offs needed to buy into weakness. These buyers have a vested interest in obtaining the shares at the best possible prices with as few investors on board as possible, so stories have to be floated (sorry, I mean broken by responsible reporters) in major media outlets in order to create fear, panic, hopelessness, and finally apathy so they can acquire such large amounts of stock.

Bill has been around the block more than once, and this guy knows what he's talking about.

Now, let's get to the (massive) profit side of the equation.

A Wall Street firm who can trade against the investor for their own account, as well as influence investor sentiment and behavior may be using the current market environment to accumulate a huge position in blue chip stocks.

For this discussion, we'll use Blue Chip Stocks A&B.

1) Blue Chip Stock A

-widely held, and highly liquid.
-24 month high /$41
-Current Price/ $12
-Accumulate massive position
-Unwind position as market maker from own account at $$20-$40 over the next 3 years.
-Built in profit- HUGE

2) Blue Chip Stock B

-widely held, and highly liquid.
-24 month high /$62
-Current Price/ $117
-Accumulate massive position
-Unwind position as market maker from own account at $35-$60 over the next 3 years.
-Built in profit- HUGE

You can tell that this proprietary trading is taking place when you read or listen to the quarterly earnings reports of the Wall Street firms. I urge you to do this, in particular look at the revenues generated from "Trading and Principal Investments."

So, how do you play this game?

1) Have the TV on mute when watching the financial channels.
2) Make up you ind if your an investor or trader.

a) trader trades monthly, weekly, or daily
b) investors buy and hold for 2-4 years.

3) As Bill Cara says above;

Just like a big ocean liner, the stock market needs time to change directions, to transition from obvious Bear to obvious Bull. Large syndicates or pools of money need time to accumulate positions, their lines so immense that multiple brokers are used to complete the order, and many sell-offs needed to buy into weakness.

This is how you play the game.