Markets and Manipulation

[SIUYA 11]

A thread to discuss market manipulation.

 

There are always a lot of claims of market manipulation, its impact and its origin.

This can cover all sorts of ideas including those that think;

• their brokers manipulate their client accounts,
  
• the larger traders manipulate markets and prices,
  
• and how governments manipulate the markets and distort prices.
  

 

Various jurisdictions will change how people view this and in certain places what is considered manipulation is normal business practices. A lot will depend on how broad a definition you approach it with

For a simple but broad definition with examples lets stick to -

http://en.wikipedia.org/wiki/Market_manipulation

 

"Market manipulation is a deliberate attempt to interfere with the free and fair operation of the market and create artificial, false or misleading appearances with respect to the price of, or market for, a security, commodity or currency. "

 

........................

Rather than just populate the thread with wild conspiracy theories and other claims about governments, evil organisations or individuals, if you think something is a market manipulation then please give evidence of it, OR an example of what you have seen directly. If you have an urban myth disclose it as one, maybe myth busters can bust it.

 

Keep it to examples around markets and out of the political or religious sphere (even if you think they are related) The internet has enough of these already.

 

Some will disagree, some will tell you thats life, thats business etc - thats fine - but if possible keep it civil and maybe it might end up being an interesting discussion on what many consider is manipulation v normal practices - what is accepted as being fair, or just or what the alternatives are.

We also might educate ourselves as to some of the more devious practices out there that actually happen (not those you have heard of) that you were unaware of

and/or we might educate ourselves as to what we thought was a manipulation is really just considered normal to many others.

To many new players often believe wild stories, and equally too many old hands think some market practices are fair just because thats the way it has always been done.... so try and keep it balanced without hype.

 

Lets see what happens - if kept civil (wishful thinking maybe) it might reveal a lot of how some aspects of markets work behind the scenes.

[MightyMouse 12]

The Hunt brothers attempt to corner the Silver market.

 

Various other historical commoditites events where traders/? cornered wheat or corn and forced short sellers to buy back at incredibly high prices.

 

December Crude in 2008 ( I believe it was December crude) went up 30 dollars a barrel in one day on expiration day since a hedge was short and needed to cover. The squeezed the last drip of shit for his ass.

 

Enron traders manipulated the price of power in California, forcing rolling blackouts to occur and California had to pay dearly for power.

 

One event where a hedgefund bought enough shares of a stock to thwart a takeover bid, while at the same time they had a monster put position on the stock and made out nicely.

 

I am not 100% sure which category of manipulation any or all of these fall under, but none of the aforementioned are urban myth.

[Patuca 13]

.............Refco.........

Edited May 19, 2013 by Patuca

[Patuca 13]

Refco

 

Refco - Wikipedia, the free encyclopedia

[MightyMouse 12]

Refco

 

Refco - Wikipedia, the free encyclopedia

 

Refco is white collar crime. Not really trader or investor manipulation, but it is unethical nonetheless.

[Patuca 13]

Last paragraph "In 2001, the NFA ordered Refco to pay $43 million to 13 investors after their Refco broker used bogus order tickets to clear trades.

On May 16, 2005, the company disclosed that it had received a "Wells Notice," indicating it might face charges related to improper short selling at its Refco Securities unit and other matters. The company had been implicated in naked short sales on the stock of a company called Sedona Corp., disclosed that it was negotiating with the SEC and hoped to reach a settlement that would likely include an injunction against future violations and "payment of a substantial civil penalty." Refco put $5 million in reserve in anticipation of the settlement. The company has also been sued by Sedona in connection with this trading."

 

Naked shrt selling manipulates price.......

[SIUYA 11]

Patucca - please explain how naked selling (as opposed to legitimate short selling) manipulates the prices. I assume you are against naked short selling only?

 

Also while white collar crimes and fraud are all interesting - I mean Bernie Maddoff was very good at manipulating his clients and books - his prices were complete fantasy - but he did not really manipulate the markets as he never traded!

 

It would be good to have your views on HOW naked short sellers manipulate the markets.

thanks.

[SIUYA 11]

Mark to market v Mark to Model

(a simple example within a firm)

 

A lot of manipulation of prices occurs because of issues surrounding mark to market v theoretical valuations.

Basically when portfolios or individual instruments are traded the easiest way to keep track of them is via a PL....and the two simplest ways to keep track of a PL is.

 

Mark-to-Model refers to the practice of pricing a position or portfolio at prices determined by financial models, in contrast to allowing the market to determine the price. Often the use of models is necessary where a market for the financial product is not available, such as with complex financial instruments.

 

Mark to Market refers to using market prices as the most accurate measure of a PL. Believing that the market knows best and is the most accurate measure of what a portfolios value is at any given time.

 

Each has their advantages and disadvantages, various firms use different approaches and ideally the best ones use a combination to ensure fraud and internal accounting manipulations dont occur.

 

So how does this show it self in market manipulation?

The simplest way markets are manipulated as a result of this is when a trader is trying to hide the PL of a position by ensuring the market prices reflect 'what they want' as opposed to what the market is really prepared to trade at.(**)

Usually this is only possible in the more illiquid or over the counter products available, and often in derivative prices that have different 'valuation' methods....as the more established liquid markets push prices back to a more market determined price pretty quickly.

 

Why would a trader do this?

.....money.

Imagine a trader has a short position in an option series that is rarely traded - his model says its worth $1....but he knows if he can get it marked in the market at $0.70 his PL looks better than maybe it would if he had to exit the position. Who knows - maybe the trader is about to be paid a bonus and wants to mark it there for a few weeks to get a bigger bonus.

......risk

In much the same way sometimes a trader may wish to alter the risk profile that the risk managers of their firm monitor, by showing a reduced risk of the overall portfolio. They can sometimes do this by altering what the risk managers beleive the prices are. Again internal risk controls 'should' pick this up....but often dont or are ignored.

.........margin

Modifying prices can also help with margining requirements as many margining systems base the amounts required as margin directly off the prices that are set.

 

How do they do this?

If the instrument is not very liquid a lot will be determined on how their internal systems work, and or the exchanges work - there is often a degree of gaming the system (which does not necessarily make it fraudulent)

Lets say the instrument is listed on an exchange and is a rarely traded option series, but it has a big open position and so can affect a lot of PLs and margining requirements.

The exchange every day sends out a close of day price which is the offical price to determine margins, risk, PL etc, and this exchange price (the mark to market price) is set by the last sale price, or if there is not a last sale for the day a theoretical model.

The trader can either sell one contact occasionally to force the price down, or make markets without trading to give the impression that the price is lower than it should be.

Often other traders will not either trade against them as they have the same position as well, are smaller and hence dont want to trade against the biggest guys in the room, dont trade the more illiquid series as it ties up resources or simply base their prices off what the exchanges say....and hence traders can manipulate some prices over a period of time.

 

for OTC trades then unless there is a market whereby buyers and sellers freely transact and it is transparent then its even easier to set prices at particular levels and keep them there, until demand or supply forces you change them.

 

................

There are advantages and disadvantages in any system but to me this is where a lot of the problems occur at a base level. Usually it is small scale stuff that individual traders or managers use to hide things or paint a rosier picture of their portfolios - and usually ultimately its demand and supply that catches up with and reveals the real prices.

Unfortunately the bigger the problem, the more tempting it is to hide the issue and not in any fraudulent way but almost as this is how its done, so dont rock the boat.

 

when it comes to derivatives and intra firm portfolios - they usually expire and hence either need to be rolled or the position unwound, but there have been many firms left with 'time bombs' whereby the true extent of a problem has been hidden until well after a trader has been paid or left the firm....but in the meantime if you are sitting watching and wondering why a certain option series if constantly priced differently - this might explain it.

 

(**As a lot of it has to do with accounting and hiding things - as per usual I blame the accountants for all the worlds woes )

[SIUYA 11]

The Hunt brothers attempt to corner the Silver market.

 

Various other historical commoditites events where traders/? cornered wheat or corn and forced short sellers to buy back at incredibly high prices.

 

December Crude in 2008 ( I believe it was December crude) went up 30 dollars a barrel in one day on expiration day since a hedge was short and needed to cover. The squeezed the last drip of shit for his ass.

 

Enron traders manipulated the price of power in California, forcing rolling blackouts to occur and California had to pay dearly for power.

 

One event where a hedgefund bought enough shares of a stock to thwart a takeover bid, while at the same time they had a monster put position on the stock and made out nicely.

 

I am not 100% sure which category of manipulation any or all of these fall under, but none of the aforementioned are urban myth.

 

the hunt brothers are a classic. Enron definately...

 

IMHO....

I dont think the crude oil short covering rally is manipulation though - that to me is a trade,

 

the hedge fund trade is an interesting one - on one hand i view that as a trade as well, and yet Corporate shennanigans are were the biggest manipulations occur and this is an example of good - the reason i see it as this is because they did not set the price, they simply took advantage of a situation - clearly this would not be possible on every takeover.

I have seen other examples whereby takeovers are thwarted by corporate negotiations, or someone holding out....think about it this way - you have a company that is practically bankrupt in a dying industry etc...you are short, and then some m..f comes in and takes it over --- is that a manipulation? I would not think so.

 

...............

Here is an other example recently which is more a trade IMHO.

Apple raised $17bill in bonds yet has all this cash on hand - tax arbitrage reasons - but is this gaming the system, perfectly sensible or manipulation?

http://www.economist.com/blogs/buttonwood/2013/05/apples-bond-issue

 

......I am more interested in the examples that affect everyday accounts, OR real big time true manipulations like trying to corner the markets.

Was the London whale an example?

Edited May 20, 2013 by SIUYA

[BlueHorseshoe 10]

Emily Lambert's 'The Futures' (a really good book about the origins of the Chicago exchanges) gives a very amusing account of interference in the oil markets.

 

Sea water was pumped into massive tanks at a depot, and then a few inches of oil was floated on top of the water . . .

 

BlueHorseshoe

[SIUYA 11]

Thanks Blue - the old style scams were good ones - it sounds like when they fill fruit nd veges or frozen chickens with water to increase their weight.

 

speak of the devil....

 

Enron No Lesson to Traders as EU Probes Oil-Price Manipulation - Bloomberg

 

....again a lot has to do with reported prices - the obvious link to Libor and its similarities, but i would still like to see some manipulation that affects retail traders.

[Patuca 13]

Patucca - please explain how naked selling (as opposed to legitimate short selling) manipulates the prices. I assume you are against naked short selling only?

 

Also while white collar crimes and fraud are all interesting - I mean Bernie Maddoff was very good at manipulating his clients and books - his prices were complete fantasy - but he did not really manipulate the markets as he never traded!

 

It would be good to have your views on HOW naked short sellers manipulate the markets.

thanks.

You increase the supply of dollars you decrease the value of those dollars. You increase the supply of stock you decrease the value. naked short selling increases exponentially the supply with phantom shares...i.e. shares that don't exist ....and these are sold this ....depresses price...kinda of like dumping garbage tons of it on the market....no real worth..in normal shortselling the shares are borrowed to short. they are real shares. at least that is the way it is supposed to work. there is some jacking around even in normal short selling but in naked short selling millions of shares that don't exist are dumped on the market..that depresses and manipulates price...maybe i'll look around and see if i find a visual explanation (video clip...diagram...or something that better explains the phenomena) but basically it is an abnormal increase in supply to drive prives down intentionally. this driving down of price is something way outside of normal price movements in markets caused by normal buying and selling pressures. It is a ponzi scheme. Selling something that does't exist.

[SIUYA 11]

Patucca - do you think the size of the naked short sellers in equities is such that they have a large enough difference?

Granted that in certain circumstances it can, but this then usually becomes an economic decision by the sellers to wear the costs of failed trades (as they could not deliver the shares because they did not borrow they are usually fined - without making naked short selling completely illegal, then this is usually the greatest incentive to prevent it - while most brokers wont let people naked short sell (I thought most brokers were fined for allowing clients to do so in the USA?))

 

Personally I just find it funny that people get so up in arms about short sellers, especially naked short sellers when I think that this is a small element (maybe I am wrong) of the overall markets volumes. There seems less concern with the naked (think emperors new clothes) longs that fleece more money from investors.

 

What about the manipulation when you consider that share lenders often pull back or recall their shares that they have lent out to force a short squeeze - I think this happens more than worrying about the short sellers.

Additionally the lack of ability for legitimate shorts often causes more market distortions in the derivatives or even over the value of those shares.

 

As for it being a ponzi scheme....what about the use of derivatives to short an instrument - this then becomes a ponzi scheme as well?

What about futures - the vast majority of those both buying and selling have no intention of delivery?

 

(there are so many papers written on short selling and naked short selling its hardly worth bringing up many unless they are really worth reading. Any readers can find plenty of them)

 

Interested in yours and others thoughts.

.................

As for dollars - this is an interesting one - I have always been of the opinion that there is not much difference with gold (and many other instruments) - the only limiting factor is that one is more scarce than the other - but in terms of people applying value to it - there is not much difference - this for me goes to the heart of anything of value.

Another thought I have always had regards dollars and the idea of devaluing them by printing more.....what is the difference between dollars as hard paper currency via the printing press - and dollars as IOUs?

Taking a broad view of it I think there has always been a ponzi scheme of sorts any time there is lending of anything that is not physically held or paid for in full. I dont argue with it but try and understand it and go with it.

Edited May 20, 2013 by SIUYA

[Patuca 13]

Here are a couple of interesting articles that may shed some light......

 

Gangster State America -- Paul Craig Roberts - PaulCraigRoberts.org

 

http://www.paulcraigroberts.org/2013/04/04/the-assault-on-gold-paul-craig-roberts/

Edited May 21, 2013 by Patuca

[Patuca 13]

Update

 

Assault On Gold Update -- Paul Craig Roberts - PaulCraigRoberts.org

[SIUYA 11]

Patucca - for me - while its always good to think about these matters I think that the article on gold selling by Paul Craig Roberts is so full of BS assumptions and rationales that its a joke to read and discredits any real work in uncovering any real manipulations that might occur. Possibly he is a plant by the manipulators in getting everyone to think a particular way - you know the double double agent manipulation controlled by the manipulators...

the endless possibilities.

 

Below is my own skeptical opinion for balance.........

The whole premise does not make sense.....why would the US government/FED (lets use them collectively even though they are different) not want the USD to fall - of late there has been a competition between countries to lower their exchange rates, the US is always accusing China of being a currency manipulator and keeping their exchange rate supressed, there are constant calls for some countries to leave the Euro precisely so they can devalue their currency and fix some of their problems....so when he mentions all the problems or a falling dollar he also forgets the benefits.

Then in critisizing the policy, he would prefer an economy whereby 'panic would reign' --- many would agree the too big to fail policy is fraught with danger, but the Fed then by his standards is doing a pretty good job as there has not been panic. (as yet)

 

Lets go to the market analysis.....

"Rapidly rising bullion prices were an indication of loss of confidence in the dollar and were signaling a drop in the dollar’s exchange rate." - gold has been rising over the last decade - and I think you might find that the rise in other countries (Asia, South America) might have also taken away some of the value of the USD.....just a guess.

I love how a person also knows who is doing the selling - really?? - take away this an the rest falls over and maybe it was a series of large holders, a large speculator, a culmination of events that transpire to cause a sell off....this then may trigger a bunch of stops etc that helps push the process --- it called a market.

Given there appears to be a criticism about naked shorts in the futures markets (I assume this is where he is talking about) - then I would say most of us are guilty of it - I must confess i have traded futures with no intention of delivery - and shame on me - I had longs as well....we had best be critical of all such speculation.....you know I actually insure my house with no intention of having it burn to the ground either

 

It good to explain how the market works -"If enough shorts are sold, the result can be to drive down the market price." - shock horror - reverse this for longs - its called supply and demand....along with the massive assumption that the shorts had no intention of delivering, but the longs did want delivery - and yet they stopped them selves out, and that most long contracts are not delivered either.

then there is the knowledge he has that a real investor would spread out sales over time - right....how would he know this, and would not previous large central bank sales at the bottom of the market ten years ago seem to indicate they might not be that good at this. Over the years, you get to see plenty of large all out orders by institutions, or traders etc. Thats what makes the market - some people actively making decisions - they may or may not coincide with his method of trading.

...and just to top it off - the selling which drove down the price, and the claim that it was naked short selling followed by this "who can afford to loose this much money" - wtf?

if it was a naked short seller - they made money.

if it was a long holder from many years ago that dumped their holdings - they probably made money

if it was a long speculator dumping for a loss - then they were probably responsible for buying at the high prices previously....

me thinks the good doctor is confused and thinks that just because gold once touched 1800 its always worth it, and that any sale below the high is a loss.....I wish i could claim that on all my investments....

Also not sure what gold price he is looking at, but is gold really suppressed at $1400 yet?

 

he does have a point - "In other words, by trying to protect the dollar from its quantitative easing policy, the Fed might be hastening the dollar’s demise." --- the old thing of spending more than you make usually hurts at some stage.

 

As for the Fed rigging the bond market - ahem - thats their job.

 

and for GS and the hedge funds orchestrating 'moves' and using the PR machines - well I guess that we should ban advertising, marketing etc on opinions - all those astrologers will be out of business....and does any one remember when GS had calls that oil would go to $150 before it collapsed to $30, then reversing their calls at the bottom - maybe they nee to get some money back....there is a lot of research that shows that the opinions of the banks and hedge funds are just as often wrong than right - remeber some hedge funds are bulls on gold, some of the hedge fund calls are completely wrong (the ten best ideas every year often show this, as do their returns) --- selective choices always help push an argument to the believers....

 

.................

Just trying to add balance, either that or I am a non paid (:doh:) govt shill.

the Germany gold is an interesting one.....

but ultimately for me its trade what you see - not what you think

Edited May 21, 2013 by SIUYA

[SIUYA 11]

For those who like bank bashing, a good read or are simply concerned citizens.....

 

John Lanchester · Are we having fun yet?: The Biggest Scandal of All · LRB 4 July 2013

[SIUYA 11]

Oil manipulation.....

Europeans Oil Benchmarks Go From Trusted to Tainted - Bloomberg

 

crucial items of note -

“because markets trusted” them

"It seems that sometimes things need to be checked.”

and "The warning went unheeded until May" :doh:

The process “is everything but transparent,”

 

....it reads like a what not to do.

[SIUYA 11]

The aluminium market.....very pliable!

 

http://www.nytimes.com/2013/07/21/business/a-shuffle-of-aluminum-but-to-banks-pure-gold.html?_r=1&pagewanted=all&

[tradingwizzard 10]

US equity markets IMO

[steve46 12]

My goodness folks. of course the domestic markets are manipulated....and the overseas markets are even worse....any institution can move markets now that "Ma & Pa" have left (because they lost their money in the last downturn).....and it will probably take years (or until a new generation of older folks retire) until the public find the courage to really entertain the idea of buying and holding equities....Generally speaking its a very nice opportunity to make money...

[tradingwizzard 10]

My goodness folks. of course the domestic markets are manipulated....and the overseas markets are even worse....any institution can move markets now that "Ma & Pa" have left (because they lost their money in the last downturn).....and it will probably take years (or until a new generation of older folks retire) until the public find the courage to really entertain the idea of buying and holding equities....Generally speaking its a very nice opportunity to make money...

 

well, a buy and hold strategy would have worked in our times too....so this generation would have been on the safer side as well