Market Manipulation and Technical Perspectives

[Eric Johnson 10]

Was reading some interesting info on high frequency trading and the ability of not only funds to move the market, and the idea of adjusting tick bias by the market makers. We have some brilliant writers on this forum. Just wanted to open a thread on perspectives on market manipulation.

Here is what I had for inquiries. I noticed when trading the S+P that at critical technical decision points there would be extreme volume spikes. Do you believe in the "plunge protection team"? What are you seeing for unusual activity? I have held the opinion that the US markets have been propped up by fiat (printed) low interest money, for political reasons like passing health care.

So for me I got tired of my options on the index being disrupted by market changing announcements and things like short selling bans. I switched to forex, where the large volume over rides some of the shock of large fund injections. Have others changed their trading style, or technical tools to accommodate these possibilities? Do you consider trading to be more difficult now, or technicals less useful?

How about scalping versus swing trading? For me I want to scalp and get in and out before they make the next surprising game changing announcement or close more banks over the weekend.

Feel free to post any upcoming changes that may give a heads up on changing market technicals or fundamentals. Something like a change in capital gains tax rates, could effect technicals with lower volume, skewing some indicators.

Anyhow the point of the thread is to be more aware of what is moving the markets and tools being used to stay profitable in these historic times.

[DugDug 10]

This potentially could be a very inflammatory thread.... might be interesting watching the "we are all doomed club"

 

My two cents....

 

Markets may be influenced over the short term by people ticking instruments, but over the long term they will do what they want, no matter what anyone does. Its the self correcting nature of the beast. So it depends on your trading time frame.... longer term has less effect. However it definitely appears that over the last 30 years, increased volatility has increased whipsaws - see long term trend trading returns, and market comments on this strategy - the continually adjusting players here have done better than the old school ones. There will always be trends, bubbles and crashes.

 

I dont think technicals have changed over the long term, its just that nothing works all the time, and you need to be flexible enough in how you view certain patterns/indicators/price action in the context of the market.

 

Clearly the largest change of recent years has been via technology, direct market access (DMA), increased leverage, increased volumes, narrowed spreads,more traders (retail and institutional). My point of view is that this has actually made the markets more transparent, more liquid and more open to increased players - all a good thing.

Clearly people have changed their styles - high frequency trading, day trading - previously tough for most to do on the floors. Even market makers have changed their styles. Global risk books are more the norm than individuals running a book. Lets not forget that bucket shops have always been around - Jesse Livermore, Dutch tulip trading...

 

..........

things to watch out for....

 

Pressure on reducing leverage - not a bad thing, so long as its not demonised, but I always thing anything over 25 times is asking for trouble.

 

Taxation - this affects returns (as its only after tax returns we should be concerned with), it appears that the world is slowly moving toward a global taxation system - trying to get rid of the tax havens and regulatory arbitrage. Ultimately this will not stop people from wanting to make money, I doubt this will make much affect in the behaviour of daily traders - more so investors.

 

Regulation - this is the elephant in the room....really no idea, as the regulators seem to have no real idea either...... however ultimately the big players are all regulated anyway, they will find ways around most things eg; setting up elsewhere, calling prop trading market making- Bernie Maddoff does not count as he never actually traded!

 

China/India - China - well.....its still a communist country, people forget that but Watch the volumes explode in these countries over the years.

 

See first comment - the market will do what it wants anyway...

 

I am currently trying to amend my trading styles to incorporate more short term trading.

learn adapt survive.

Edited February 3, 2010 by DugDug

[BlowFish 10]

I think it's a common mis conception that high frequency traders move markets a large part of their volume is arbitrage. This ensures correlated markets are not mis priced their actions do not increase volatility. High frequency traders are de facto market makers, competition between them narrows spreads increases liquidity and is an all round good thing.

 

Flash trades are a different matter but if they have any sense the SEC will ban them (which they are considering apparently)

 

If you read something like reminiscences of a stock operator you can see the players have changed but the game remains the same. If you want to learn about the game in detail a good book on market microstructure would serve you well.

[DugDug 10]

Hi BF - I always wondered about the rise in high frequency trading, and if the majority of their trades are arbitrage/market making OR if they are actually trying to scalp and trade direction, I figured most were arb guys, selling Russian bonds to hedge against Indonesian Palm Oil.

 

Definitely a lot of quant trading can move markets - especially when they all go one way and when they look to all get out at the same time.... whoops.

 

So I guess they can be seen as influencing market moves rather than manipulating them. What about initiating market moves?

[BlowFish 10]

On the whole arbs make money on there hedge portfolio returning to parity. The question is how out of lines things need to get before you trigger. Other arbs will be competing.

 

I am not sure anyone 'initates moves' per se. (I guess MP terminology could encourage this way of thinking of things with initiating/responsive categories). Traders tend to work orders to get positioned without moving the markets. Sure there are more sophisticated instruments and al sorts of tools nowadays but I think the game. You mention quants, well they simply use mathematical models to detect disparity in pricing, it's just another form of information asymmetry with a particular characteristic.

Edited February 3, 2010 by BlowFish

[DugDug 10]

I always find what moves the market interesting - not from a fundamental point of view, but how people react, and people ticking things. It comes from my days as a market maker. but I have never been a conspiracy theorist of sorts.

 

This may boil down to definitions.....

In this discussion I would separate the quants, the arbs and the market makers a little....just as a matter of definition - totally up for debate of course. was LTCM a quant or an arb player?

 

Mainly with the quants actually taking positions - not just trying to detect disparity in pricing (ideas of value v current price, relative values etc) , but also they were/are also BIG momentum quants. These definitely moved markets in Aug 2007 - the buyers disappeared and the quants all had the same positions on.... they forgot about liquidity.

So was it the buyers who by disappearing manipulated the markets?

Its a bit like blaming the lawyers for the global financial collapse by helping design the contracts, that allowed/encouraged the leverage.

I dont know.

[BlowFish 10]

[quote name=DugDug;88782

 

This may boil down to definitions.....

In this discussion I would separate the quants' date=' the arbs and the market makers a little....just as a matter of definition - totally up for debate of course. was LTCM a quant or an arb player?

 

.[/quote]

 

I rather like Harris' definitions (categorisation really) of market participants,why they trade and how they trade. Seems comprehensive to me.

 

Personally I don't see ' a quant' as a type of participant. I see it/them as a technique of analysis rather than a type of participant in its own right. So Arbs might use quantative techniques (and almost certainly do). Dealers trading other peoples order flow might use quantative techniques (almost certainly do to measure performance if not to actually trade). etc. etc.

[Eric Johnson 10]

Interesting ideas for sure. I was trading corn futures when it went electronic a few years ago. The daily ranges went wild, and it seemed to trade mirroring the stock market, more than the underlying value of a bushel of corn. It blew my normal technicals out of the water, going limit up for almost 3 sessions.

 

I am noting the disconnect of underlying asset value, and the power of speculative binges. Something like we saw in the price of oil. Then there is the question of what kind of measurable forces would bring about this kind of swing. Is there predicable times (like announcements) when technicals are dramatically altered?

For instance I was trading the S&P when it hit it's lows of 666. Form this point should I have predicted that there would be such a V bottom? Was there really so many people sure that the underlying value of the S&P assets were worth so much more the very next day? I am asking kind of out there questions for the following point. I wonder if it was some kind of plunge protection triggered, or just normal market technicals for a rebound. And I do not think that the companies were worth that much more the next day, but the index sure acted like it. Actually we did predict the bottom technically, but expected a test of the lows, maybe even a nice pullback to go long on.

So on a mirco scale it is interesting to see how limited or unlimited the effects could be of high volume trades at key points or formation decision points. I guess it depends how much money a large player has to risk to attempt to steer the market.

Finally I really value what the guys are discussing. I have always been interested in things like, how is the high and low of a day determined? Think about it, there must be a few market orders that get filled at absurd prices. There has to be a filter for what counts. That has a great bearing on my technicals. Enough for now, so glad this is not an online gaming forum, I would have to go to nerds anonymous for enjoying these conversations.

[Eric Johnson 10]

I wonder if others have observed this aspect of revised historical charts. I was trading the Nasdaq around Feb of '09. I was trying out a opening gap close trade. I took a small QQQQ option, and even had the futures feed to watch it 24 hours a day. The gap was never even near closed on the minute charts, but all sites like Yahoo and daily historical back fills showed the high and lows with a closed gap.

 

This is the idea that those who control the past history color the future, especially if they could shape technicals. Like I posted before, who controls what exact tick that reflects open, high, low, close? Could the formations like head and shoulders be sculpted to suck in dumb money then reverse? Also I have seen different price levels for the historical highs of the S+P, varying around 20 points.

 

To something more concrete. The statistical shaping of the past and market directing. Here is one of my favorite sites reporting the major upcoming revision of the way unemployment numbers will be accounted, coming up 2/5/10, yes Friday.

 

Mish's Global Economic Trend Analysis: 824,000 Will Disappear On February 5; BLS Admits Flawed Model But Plans No Changes

 

I do not know if it will matter to the markets. It does show the ways that stats are manipulated and things like the GDP figures are of suspect and constantly revised.

 

Of course there are an unlimited number of factors that drive the markets. This has directed my system building to focus on technical high probability scalps. I look for things like times when the markets are acting fairly normally, the 24 hour forex markets offer many hours when the markets are just coasting along. Then I look to isolate technical setups that may not be huge pip runs, and may only happen a few times a day, but are in the 80-90% probability of being effective trades. I would love to be a relaxed swing trader of day bars, but the stream of market directors has gotten so fast moving and hard to predict. Like when is an announcement out of China going to shake the markets? Never mind the meddling regulators and weekly game changers. Why would I want to bet my money on what the team of Bernake, Obama, and Geitner will spring on the markets next?

[DugDug 10]

Revised numbers - this has always been the case....I find it crazy, but that is why if looking at fundamental numbers you either need to look at the trend for those numbers - to make longer term fundamental decisions, or really focus on the expectations of those numbers, factor in the context of the market moves and trade off expectation v actual numbers on the days....there are some big global macro guys I know who combine both pretty well over the long term. But once they got whacked 15% in a month by a Swiss inflation number that caught everybody out....in the final analysis it was shoes that caused the issue and in the revised numbers, the shoes were taken out of the equation.... too late the market had moved and they were stopped out.

It seems you either need to be short short term and avoid the numbers, or longer term where the numbers make less impact....in between can hurt.

 

Re historical data.... this is a tough one for a retail trader. Some big quant houses collect their own data, I heard one of them spends $2mill a year collecting and storing. For the rest of us we have to make do. Thats why I have done some simple testing (I am not a programmer), whereby I use it to test the overall idea, the parameters that tweak the system and make sure that the numbers are reasonable.... however I never believe my numbers because I dont believe the data is real.....hence why real time paper trading something is vital with real data live time - not just walk through trading of historical data.

Overall I still dont think the technicals change that much, its just that some of the simpler patterns/ideas work in some markets better than others.....eg; any mean reversion system or support based system is more likely to fail, or not look good in a sustained downtrend. Its still all about context.

Edited February 4, 2010 by DugDug

[DugDug 10]

Here is a good story regarding stocks - I can tell you there are days where one particular trade will move a market for no other reasons than they just cannot find volume on their opposite side. Yet they insist on and need to get set.

(I have plenty of these stories as I traded about ten stocks very closely for about 8 years)

 

example; (This involves option concepts, so hopefully I explain it clearly enough for most to understand.

 

a bank stock I was en equity option market maker in - one day somebody walked in and bought 1000 OTM call contracts (each contract was over 1000 shares) hence a potentially 1mil volume share trade. At the time these were out of the money and had a delta of about 6 (out of a possible 100) (average daily volume was 3mil shares a day in the underlying)

 

4-5 months later this person came back into the pit to sell their now deep in the money call options, 20 minutes before the close, the day before the stock went ex dividend - so they had to either excise, or sell or they lost the dividend value in the call. There were only three market makers here at the time normally 5, and we recognised the order coming back, so we organised with the broker to do this in the most orderly fashion possible...... so we sold the ended up selling about 1 mil shares (a third of avg vol) in 20 mins as our hedge, buying his calls back. A straight market maker arb, Anyway the stock got slammed about 5% in the last 15mins. He made about 1.7mil from a $100,000 investment.

We took our small clip off fair value.

 

On the charts it looked a bit abnormal, the press and brokers reasoning the next day were - "possible rights issues", "bad loans", "big investor bailing", blah blah blah.... when in reality we knew what it was....none of the above (one reason I am a sceptic)

 

However, it took about a month before the price rebounded..... make of that what you like.

[Kiwi 16]

Agreed.

 

If you don't stay above or below the noise timeframe then its going to be a challenge.

[felix36 10]

To get reliable results, we have to go down to the elementary level and the elementary data perform calculations for longer time intervals.

We assume that we have two completely identical OHLC bar in duration from one minute to complete the same volume.

Rights size distribution of capital will be different for both because it depends on each individual element within that interval, which does not and usually is not the same.

If you performed the calculation based on data the two minute bar and the same corresponding volume, get the same result, but it would be inaccurate.

 

So we actually get for pre-encrypted information.I when we see bullish engulfing or what so it means nothing.

When analyzing candelsticks even that does not mean anything.

Under each candelstick and two completely identical with the same volume in an interval, no matter whatever it was is special and unique story.

Nothing can be more plain reading with technical analysis.

 

OHLC nor any volume that belongs to him is not enough.

We can not find anything with that information because it is already "under the surface" formed.

It is logical.

If T.A. based on price and volume, and price is manipulated, the relative volume also grinding to extremes in HIGH FREQ.TRADING.

Complete T.A. what most use is also MANIPULATED not worth anything

What Elliot Wave, Fibonacci?

Do you think that a computer program has embedded itself in the subconscious sense of aesthetics, such as people?

Sometimes there were, and still do not.

[jaygo 10]

To get reliable results, we have to go down to the elementary level and the elementary data perform calculations for longer time intervals.

We assume that we have two completely identical OHLC bar in duration from one minute to complete the same volume.

Rights size distribution of capital will be different for both because it depends on each individual element within that interval, which does not and usually is not the same.

If you performed the calculation based on data the two minute bar and the same corresponding volume, get the same result, but it would be inaccurate.

 

So we actually get for pre-encrypted information.I when we see bullish engulfing or what so it means nothing.

When analyzing candelsticks even that does not mean anything.

Under each candelstick and two completely identical with the same volume in an interval, no matter whatever it was is special and unique story.

Nothing can be more plain reading with technical analysis.

 

OHLC nor any volume that belongs to him is not enough.

We can not find anything with that information because it is already "under the surface" formed.

It is logical.

If T.A. based on price and volume, and price is manipulated, the relative volume also grinding to extremes in HIGH FREQ.TRADING.

Complete T.A. what most use is also MANIPULATED not worth anything

What Elliot Wave, Fibonacci?

Do you think that a computer program has embedded itself in the subconscious sense of aesthetics, such as people?

Sometimes there were, and still do not.

 

?... im sorry, I understand that english wasn't your first language but i didn't understand a word of that.

[felix36 10]

I'm sorry.I will try again here ...

 

To get reliable results, we have to go down to the elementary level (PRICE / SALES) and elementary data perform calculations for longer time intervals. If we have two completely identical bar OHLC a period of one minute with the same volume.

 

Rights size distribution of capital will be different for both because it depends on each individual element within that interval, which does not and usually is not the same.

 

So we actually get for pre-encrypted data. When you see the bullish engulfing or anything like it means nothing.

 

We can see nothing with simple technical analysis. OHLC and volume is not enough. We can not find anything with that information because it is already "under the surface" formed.

 

Thus with high frequency trading, not only to cut the order of millions of small, but bring noise and can manipulate prices by the combination of an incredible amount of volume to bid on 3 and four decimals ...

[DugDug 10]

I dont understand either.....

but I think Felix is saying,

"as everyones OHLC and time will be different - everyone can see different patterns - which makes them largely irrelevant to test":)

[Eric Johnson 10]

Here is what I got from it, the basic input that we use for technical indicators is not sufficient to render useful information. This is due to the unique factors that go into forming each bar. We cannot tell things like, where the volume was generated from, the duration or intent of participants, if people are opening or closing positions, and so on. He says we need to use the price sales data calculations to get a truer understanding of the market condition.

I think it is an interesting point, I sometimes wonder if the market technicals work because so many people are using them, rather than any real reason of supply and demand. Don't get me wrong, I like indicators as measuring tools, but I often use them to see what the crowd is likely to be thinking.

So please share or link to what you find useful for price sales calculations. Depth is a good thing for perspective.

[felix36 10]

True Eric, Thanks for your help. I trading with stock options using their own algorithm (NAD) for tracking entry and exit of capital (in and out of stocks). I wrote about this topic in opcije.com, unfortunately in the Croatian language and I had quite a success in trading help of indicators used to THINKORSWIM platform. Here are some of the links, though I'm not sure how many will be understandable.

 

Declare lower;

#Thinkorswim indicator study code by Felix

# NAD

# Market Data Manipulation Indicator

# October 14 2008

Input ma5=5;

Input LEN=390;

Def formula=(((close-open)/volume)/open)*100;

Def SELLING=volume/(((formula*volume)/100)+2);

Def BUYING=volume-SELLING;

Def DIFF=BUYING-SELLING;

Def suma=sum(DIFF,LEN);

Def ma=Average(suma,ma5);

Plot NAD = ma;

NAD.AssignValueColor(if ma > ma[1] then color.dark_green else color.dark_red);

NAD.SetStyle(Curve.Firm);

NAD.SetLineWeight(4);

 

Seciranje noviad indikatora 2. dio | opcije.com

The Matrix, but with money: the world of high-speed trading

Can Goldman Sach's Stolen Code Be Used to Manipulate the Markets?

[Eric Johnson 10]

Wow, gathered what I could from the links. It looks like you have a system of indicators or a way to tell when high frequency trading is in action. Then perhaps a way to use the data flow from price sales to trade the market.

 

It looks like you have a lot to share, I do not have the Sink or Swim software so I am limited. Since it looks like you have a unique perspective on market manipulation, I welcome what ever you feel like sharing here. I do not want to labor you, just if I can help get something this interesting to the creative people, I am in. If you want to do another separate thread I will also assist. I live overseas and labor to get ideas communicated daily.

[Shawn 10]

It is the world economy that is actually steering the stock market. Here I am referring to the US, China, Japan, Australia and Asia stock market. The recent v-shape recovery trend is definitely understandable if one were to consider the true state of economy of China and Australia. It is the media that is feeding us with all the bearish news where they have been so entrenched with the US market. Their reluctance to give China's economy a good analysis without fear and favor is the primary reason most investors in the streets wouldn't be able to grasp the fundamentals behind the v-shape recovery. We always hear from the smart financial analysts, highly successful fund managers and great economists from the West. The fact is that we have to always balance our source of information in order for us to understand the current fundamentals of the world economy, helping us make better judgment and decisions for our investments.

[Kiwi 16]

It is the world economy that is actually steering the stock market. Here I am referring to the US, China, Japan, Australia and Asia stock market. The recent v-shape recovery trend is definitely understandable if one were to consider the true state of economy of China and Australia. It is the media that is feeding us with all the bearish news where they have been so entrenched with the US market. Their reluctance to give China's economy a good analysis without fear and favor is the primary reason most investors in the streets wouldn't be able to grasp the fundamentals behind the v-shape recovery. We always hear from the smart financial analysts, highly successful fund managers and great economists from the West. The fact is that we have to always balance our source of information in order for us to understand the current fundamentals of the world economy, helping us make better judgment and decisions for our investments.

 

 

Oh Shawn, I suspect that your world view is about to get a good solid shaking. For a hint on the nature of that shaking you might consider:

- which economies in the 30s suffered worse, exporters or importers?

- if you ignore exports of minerals to china and india the aussie economy is a load of give away supported crap (every tax payer was given a $950 hand out to buy a chinese flat screen tv and help out the retailers).

- finally you might study supply chains and how hard it can be to tell at one end of the supply chain what is happening at the other and react in time.

 

On the other hand, the media (who most see as having pumped the dump) might all just be nervous nellies.

[Eric Johnson 10]

I saw we have some similar threads linked lower on the thread page , some interesting posts there also. For the sake of my own research I looked up the following info about the plunge protection team. There are real processes and funds to intervene in market crisis. I just wonder if these days they use "preventative " intervention. Lets say if an obvious bearish head and shoulders formed on the S&P, maybe they would intervene at the neck line rather than at the bottom follow through. Perhaps guide a large channel breakout direction? Maybe just when they want to do some inside trading with fed funds? I mean Madeoff was a Nasdaq leader back in the day, it is not out of the question.

 

washingtonpost.com: Plunge Protection Team

 

My mother was the economist that produced the unemployment report for one of the US states. There is massive place for statistical misrepresentation. I think that governmental agencies may stretch the figures for GDP and unemployment numbers. This may not be evil, but it effects technicals, and can drive prices against them.

 

This brings me to my final point. I agree that the media can be used to guide the markets. Living in Asia, near China, I suspect that their media and statistical numbers are more subject to political control. I post the following article for consideration, as China is a big player.

Mish's Global Economic Trend Analysis: Nonperforming Loans in China Rise to "Trillions of Renminbi"

[jackj 10]

You're saying that the Working Group, which does exist and is not a secret, is the PPT. FWIW, PPT as it has been alleged, and the role that you're implying, has never been proven. The Working Group does inject reserves to keep things afloat, but that's diff. from outright buying of equities. If there were a PPT, or the Working Group were acting in such a manner, I think that we'd have heard/seen definitive proof of it. As with all conspiracy theories that require many participants, over many years, I can't fathom that someone wouldn't have spoken up, and with definitive proof. The argument against it is that lack of a personal account of it, as well as evidence of where all of these orders are on the books? Where did they get funneled through? I imagine it would be possible for Goldman, et. al. to be in on it and not divulge who was on the other side of these orders that shot the market up, but someone on one of the desks would surely have said something by now that they're putting in orders for a non-company. I don't know enough about the specifics of a trading desk, but it seems like it would be very hard, at the least, to disguise a PPT. Also, it sure seemed to me that they would have acted a LOT sooner during the recent crash if indeed they existed. Pointing to a sudden bounce after-the-fact it's easy to say it was the PPT, but eventually things were going to rebound from natural forces.

Did the equities simply get oversold during the panic, and hence an extreme reaction occurred in the other direction, causing the v-shaped bounce? Did the PPT also cause oil to drop from its highs, or rise from its lows, or did it also simply get overbought, and then consequently oversold, in v-like fashions? Absent any proof (having the Working Group, in my opinion, doesn't fulfill that for me), I opt for the latter scenario. My .02 worth...

[Eric Johnson 10]

Well said, I think the lines are blurry in the last bailout. Geitners dealings with AIG for funneling bailout funds and providing liquidity for some like Goldman were secretive. Not too hard to hide bulk orders for companies that do high frequency trading. It is rumored that threats to national security secrecy was invoked for these dealings and auditing Fed purchases. So yes, overt and covert funding could flow into the markets at key junctures. Normal market participants could get caught on the wrong side of the trade due to secrecy.

 

Diverting funding to run around restrictions or publicity is not too unusual of a consideration. It is my understanding of how the Fed monetizing the debt, rebuying from large front purchasers after a week or so.

I will ring the conspiracy bell one more time to be risky, but clear. I recall that there were large market shorting orders before 9-11. I do not think the origins were ever disclosed. If they were terrorists they would have been trumpeted as another reason to go to war.

 

Really it is all a blurry subject. And more of an inquiry than a crusade for me. The thing that I have learned is that it is all printed money, many times removed from supply and demand. So give these markets room to swing wildly. Selectively abandon historical biases of what should be true market value. Actually for me I rely on the technicals more in normal trading. I am not sure if anyone really knows what the underlying assets are worth anymore. Hence at least people are familiar with technicals and revert to them. Market manipulation has been the theme of this time of intervention and selective choosing of market winners by the government.

Edited February 7, 2010 by Eric Johnson

[amswak 10]

Its seems a little naive to me to think the market isn't manipulated, but equally naive to think it hasn't been manipulated since its inception.