# What should be allowed on the financial markets?



## basilio (13 May 2013)

A couple of days ago I posted a link to an analysis which alleged that very strong short selling attacks on a company had been reversed by the perpetrators being able to buy large share volumes off market from apparently related entities.

Many posters seemed to think this was just part of the rough and tumble of the market and that smart investors would  wise up quickly. In essence - investor beware.

So my question now is :
*
"What  behaviors by brokers, directors, CEO's whoever do you think should be regarded as illegal, how should they be  monitored and what do you think should happen to the perps ? " And perhaps a few examples .*

I'm just interested to see how far a free market  and individual creativity should operate in your eyes versus protection for shareholders and other parties.

Cheers


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## CanOz (13 May 2013)

Buying, selling, shorting, covering....What else is there? Dark pools...:frown:

Should large trades off market be allowed? Not unless its disclosed, in my view. I don't see how a free market can be considered a market when the deals are done behind the scenes. To me this would be the last straw for the mom and dad investors, they've already been burnt from buy and hold.....


CanOz


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## chops_a_must (13 May 2013)

Agree with Canoz.

What would be the point of a stock exchange if that were to happen widely?

A big problem on the ASX is the inability to hedge through liquid derivatives and options markets.

This behaviour is a function of that IMO.

If you're short covering, you can lock in your profits with options that won't effect the share price as badly.


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## Zedd (13 May 2013)

Still haven't got around to reading the paper you posted Basilio, but tend to agree with your sentiments posted that market manipulation is wrong legally and morally.

IMO current laws are sufficient w.r.t market manipulation and insider trading. Enforcement is the real issue. Unfortunately it's very a costly and time-consuming process to investigate these sorts of trades, let alone gathering enough evidence to successfully prosecute, which begs the question who pays? 

It's a trade off that's made and I for one think the markets are transparent and stable enough to not warrant further action at the expense of higher fees and taxes.

All depends on your investing/trading strategy though I suppose. Leveraged or small volume high risk plays are the obvious losers.


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## Trembling Hand (13 May 2013)

basilio said:


> A couple of days ago I posted a link to an analysis which alleged that very strong short selling attacks on a company had been reversed by the perpetrators being able to buy large share volumes off market from apparently related entities.




Basilio you have not proven that 

1. Trades happened between "apparently related entities"

*AND*

2. How with any stretch of the imagination if a party is related and they trade between themselves how do they profit from it. Its basic maths mate.


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## Zedd (13 May 2013)

Trembling Hand said:


> Basilio you have not proven that
> 
> 2. How with any stretch of the imagination if a party is related and they trade between themselves how do they profit from it. Its basic maths mate.




Sorry to come in off the sideline here but you've posted that question a few times. I kept meaning to find some references for you from a class I took on market manipulation but felt a quick answer was appropriate now and maybe a referenced answer later if I get around to digging out my notes.

The two ways that come to mind to gain from market manipulation are controlling supply, and creating momentum.

Trading back and forth between two parties is a zero sum game as you point out, not counting any trading fees, but what they're doing is creating liquidity, if not a price direction also. The idea being the market notices this apparent change in liquidity, assumes growing momentum and then picks it up and runs with it. The two parties can then let the market run away, triggered purely through their own actions. A few tactically placed trades prior to their manipulation and they walk away with an abnormal profit generated through irrational market behaviour. 

Lots of risks, besides the obvious illegalities, but if it pays off the parties have made a profit irrespective of the fundamentals of their target. Clear?


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## Trembling Hand (13 May 2013)

Zedd said:


> Sorry to come in off the sideline here but you've posted that question a few times. I kept meaning to find some references for you from a class I took on market manipulation




Mate you are dreaming, with all due respect.


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## Zedd (13 May 2013)

Trembling Hand said:


> Mate you are dreaming, with all due respect.




Didn't sound very respectful. Was the scoffing at the class or at the fact that I studies the topic briefly? FYI, class was "Asset Price Behaviour & Financial Market Abuses", focusing primarily at the tatonnement period during market opening, but also looked at a number of other types of market abuse.


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## Trembling Hand (13 May 2013)

Zedd said:


> Didn't sound very respectful.




Ha, fair enough it probably wasn't.



Zedd said:


> Was the scoffing at the class or at the fact that I studies the topic briefly?




It was definitely at the class. Get out in the market and try that. You will be cut to pieces by the 100s other fundies and hedgies. And every other big swinging dick looking for fools to pay for their lunch.


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## FlyingFox (13 May 2013)

Trembling Hand said:


> It was definitely at the class. Get out in the market and try that. You will be cut to pieces by the 100s other fundies and hedgies. And every other big swinging dick looking for fools to pay for their lunch.




Curious, you implying it can't be done by anyone? or just by anyone without a serious amount of capital and balls?


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## Trembling Hand (13 May 2013)

FlyingFox said:


> Curious, you implying it can't be done by anyone? or just by anyone without a serious amount of capital and balls?




The trouble with the idea that you are big enough to manipulate 1 stock is flawed by the fact you have to exit. ALL big players are desperately looking for miss priced and volume. You load up to move a stock and I can guarantee there will 100 others pushing against you. So you are really going to have to go hard. Then what?

The idea that one or a few can just do as they please is completely removed from reality. The guys with the big money have massive amounts of rules, risk, position sizing, holding size for days to exit etc. its just not how volume is traded.


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## Econ Turbo (13 May 2013)

basilio said:


> So my question now is :
> *
> "What  behaviors by brokers, directors, CEO's whoever do you think should be regarded as illegal, how should they be  monitored and what do you think should happen to the perps ? " And perhaps a few examples .*
> 
> ...




Very hard to police inside trading. Unless the ICAC or the investment police set up phone monitors and bug their offices, they'll always be able to announce some information or influence the market the way they want to. 

A good way is to set the punishment way above what's needed as a deterrent. Its like that guy I think took a billion dollar position against the Aussie dollar. Now he's spruking for everyone to sell. Worked?


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## Zedd (13 May 2013)

Trembling Hand said:


> Ha, fair enough it probably wasn't.
> 
> 
> 
> It was definitely at the class. Get out in the market and try that. You will be cut to pieces by the 100s other fundies and hedgies. And every other big swinging dick looking for fools to pay for their lunch.




Point taken while disagreeing. Pricing of an asset at any one time includes all available information. In practice, this includes not just economic fundamentals but also market sentiment and momentum.

Do you agree that market manipulation is possible through misinforming the market?
Do you agree that information is provided to the market through trades?

If so, then what mechanism exists to prevent such manipulation? Market depth? If the market uses trade information to evaluate price, then it's just a question of what trading is required to overcome the existing depth.


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## Vixs (14 May 2013)

I could be wrong but my interpretation of TH's comments (and I would say that he's one of several posters here with a load of experience and screen time), is that any stock that is capable of being moved significantly by a single party's trading account or investment, is likely relatively illiquid.

If it's a liquid and heavily traded stock, the likelihood of a single party being able to make any significant, discernible difference to the price on face value alone is pretty slim to none. There are just too many market participants for that to fly.

If it's NOT a liquid or heavily traded stock even if they do move the price their direction, they've now got to sell (or buy) to close out their position and take profits. They aren't going to be able to conjure up enough muppets to close out their position, and if the stock has been ramped up, they'll just be left holding shares they paid too much for. That's the zero sum equation. They might be able to offload some units to your next door neighbour Bob who trades his SMSF account, but they aren't likely to be able to offload all of it without having the same pressure on the stock price in the opposite direction.

The reason markets move everyday is that everyone has different valuation and analysis methods. The idea that by setting up an unwarranted short-term uptrend (and that's only your definition of a trend) with some price manipulation you're going to have any impact on the fundamental analysis, longer term technical analysis or quantitative analysis? This is what I think TH was saying - these are the individuals, institutions and algorithms that will be working against your unfair or unwarranted pricing. If you somehow DID manage to sell or buy your way through them you're now left on the wrong side of everyone's analysis but your own, and you need to somehow exit what would have to be a position that is relatively enormous.


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## skyQuake (14 May 2013)

Trembling Hand said:


> ALL big players are desperately looking for miss priced and volume. You load up to move a stock and I can guarantee there will 100 others pushing against you. So you are really going to have to go hard. Then what?



Esp in this current market!



Zedd said:


> a class I took on market manipulation



Tell me more



> Lots of risks, besides the obvious illegalities, but if it pays off the parties have made a profit irrespective of the fundamentals of their target. Clear?



Sure they can put trades through different brokers and such. But if asx surveillance catches them they go to JAIL. This aint some oops sorry I forgot I had a buy order when I sold. 



Zedd said:


> Point taken while disagreeing. Pricing of an asset at any one time includes all available information. In practice, this includes not just economic fundamentals but also market sentiment and momentum.



Yes in theory, general no in practice. 



> Do you agree that market manipulation is possible through misinforming the market? Yes, twitter hoax anyone?
> Do you agree that information is provided to the market through trades? Yes, partially. Obviously news etc as well
> 
> If so, then what mechanism exists to prevent such manipulation? Market depth? If the market uses trade information to evaluate price, then it's just a question of what trading is required to overcome the existing depth.



Not mechanisms, but other players. Say you're manipulating a stock up. In general you need to buy stock to push it up. Now, after a bit of a move other players will join in. It could be a scared shorter, it could be a fund manager seeking to dump stock. Could be an algo that saw this move as outside normal parameters. You just don't know how the lucky dip will turn out.


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## Trembling Hand (14 May 2013)

Zedd said:


> Do you agree that information is provided to the market through trades?
> 
> If so, then what mechanism exists to prevent such manipulation? Market depth? If the market uses trade information to evaluate price, then it's just a question of what trading is required to overcome the existing depth.




Sure people react to price. But this is where your theory from school breaks down in the real world application. If Big Swinging Dick A smashes the depth down 5 price levels you think Big Swinging Dick B,C,D out to Z will then follow? They will not. You are thinking from a small persons perspective, from someone who is scared of market moves, who can only react. *If * Big Swinging Dick B,C,D out to Z were bullish they be thinking "Who is this Muppet that just gave me 5 ticks better price I'll take all that and more please". They will happily absorb all Big Swinging Dick A has to give them. Then if possible push the other way when he is finished.

Its hard to trade size. If someone wants to blatantly and sloppily smash the depth there is ALWAYS someone happily to take the other side.


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## FlyingFox (14 May 2013)

Good points from TH and SQ. Curious, what if you want to drive the price of a stock down? Do the same principles apply or is the market somehow asymmetric due to use of stop losses etc?


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## Trembling Hand (14 May 2013)

FlyingFox said:


> Good points from TH and SQ. Curious, what if you want to drive the price of a stock down? Do the same principles apply or is the market somehow asymmetric due to use of stop losses etc?




Mostly same but as always not exactly. To a degree stop losses work the same way as a hard running stock. Stops are when people give up and spew out their position at any price they can get. A hard running instrument is the same but they give up waiting for a "good" price and chase whatever they can get. So very similar emotions and reactions.

Not to mention shorts have stops being hit when something goes up and all derivatives too.


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## Zedd (14 May 2013)

This is getting frustrating. My initial comment to TH was to describe a method by which people can manipulate the perceived value of an asset. I understand the objections getting thrown back and agree that the market is largely self-protecting due to it's depth. It is my belief though that it is *possible* to manipulate the market in a number of manners, and given the incentives to do so, I think it is *probable* that it occurs. Right person/s, right stock, right time - possible.

If there had been a proven case of manipulation by trading in the last few years I wouldn't need to quote it because you'd all already known of it. There are a number of papers, one of which was posted in the original thread, that is investigating and trying to prove manipulation by trading. The papers I studied were looking at potential manipulation pre-opening and how the introduction of a random opening, along with a visible book reduced apparent manipulation.

Is the market so perfectly rational that manipulation is impossible?


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## Trembling Hand (14 May 2013)

Zedd said:


> Is the market so perfectly rational that manipulation is impossible?




No, every stock that moves against a punter is clearly being manipulation. Every time!


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## Zedd (15 May 2013)

I can't find my notes, and I'm not sure what the rules are with links to papers that are questionably in the public domain but googling the following will find a freely available paper for download:

"Stock-price: Manipulation" - Allen, Gale (1992)
Worth a read...


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## basilio (15 May 2013)

It takes a millisecond to check out the types of market manipulations and frauds that are perpetuated around the world.

Try typing in Market manipulation and Google Wiki.  It's all there. Pools, Churning, Stock Basing, Runs, Pump and Dump, Wash Trade,  and so on. 

Also worth remembering the precursor to GFC 2008. The way that the property and stock markets were manipulated by the large banks to make squillions of dollars. Or did that never happen ?



> 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. Market manipulation is prohibited in the United States under Section 9(a)(2)[1] of the Securities Exchange Act of 1934, and in Australia under Section s 1041A of the Corporations Act 2001. The Act defines market manipulation as transactions which create an artificial price or maintain an artificial price for a tradeable security.
> Examples
> 
> *  Pools:* "Agreements, often written, among a group of traders to delegate authority to a single manager to trade in a specific stock for a specific period of time and then to share in the resulting profits or losses."[2]
> ...



"

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


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## Trembling Hand (15 May 2013)

basilio said:


> Also worth remembering the precursor to GFC 2008. The way that the property and stock markets were manipulated by the large banks to make squillions of dollars. Or did that never happen ?



Errr didn't they all nearly go broke? Wasn't the the whole point of the GFC. 

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

Nothing like re-writing history to match your story.


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## prawn_86 (15 May 2013)

basilio said:


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




Based on the definitions you provided:

Pools are simply pooling of funds, no different to a super fund.

Churning, intends to attract *other* investors by increasing liquidity. As others on this thread have said, it is a zero sum game unless someone else comes in to place orders on either side.


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## Trembling Hand (15 May 2013)

basilio said:


> It takes a millisecond to check out the types of market manipulations and frauds that are perpetuated around the world.
> 
> Try typing in Market manipulation and Google Wiki.  It's all there. Pools, Churning, Stock Basing, Runs, Pump and Dump, Wash Trade,  and so on. http://en.wikipedia.org/wiki/Market_manipulation




It may take a millisecond to check some rubbish on Wikipedia and list something that has nothing to do with manipulation, (wash trades) or illegal activity (trading pools!! ya kidding). 

But you guys still haven't proved that this stuff is easily done as you claim nor shown that it happens as much as you dudes claim (if at all).


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## Trembling Hand (15 May 2013)

Zedd said:


> I can't find my notes, and I'm not sure what the rules are with links to papers that are questionably in the public domain but googling the following will find a freely available paper for download:
> 
> "Stock-price: Manipulation" - Allen, Gale (1992)
> Worth a read...




You think so!!




Zedd have you ever place a trade? Seriously! This is why this subject is just totally out their. Please!! 


EDIT; Anyone wants to waste their time here is the link,
http://finance.wharton.upenn.edu/~allenf/download/Vita/stock.pdf
Thou you would be better off spending that time smoking a crack pipe and discussing the endurance of unicorns versus mermaids.


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## white_goodman (15 May 2013)

Trembling Hand said:


> Thou you would be better off spending that time smoking a crack pipe and discussing the endurance of unicorns versus mermaids.






unicorn ftw


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## basilio (15 May 2013)

TH you are so xxxxxxxxx disrespectful 

All I can gather from your dissing of  mine or other comments is that* there just isn't any way  the market can be manipulated because it is so xxxxing perfect. And if anyone is complaining about some seemingly dodgy deals its just sour grapes or dumb decisions.*  ( OK maybe I am over stating your position but not by much.)

I didn't start this thread to try and prove the size and range of market manipulations. I was inviting people to comment on what they thought should be allowed and perhaps how this might be challenged. And by the way that WIKI reference to market manipulation went through a wide list of activities. I just wasn't willing to copy and paste the lot.

As far as the gross market deception of GFC ?  The fact was the main crooks made out like bandits before and after the financial collapses.  The US government ie tax payers bailed out the biggest losers and since then we have seen the big investment banks continue to make billions of dollars.  Ever wondered how ?


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## prawn_86 (15 May 2013)

On topic of this thread, i think the biggest issue is 'leaky ships' so to speak.

Quite often in smaller stocks you see volume and rises or falls coming in a day or 2 before a major announcement. It is this sort of trading that should be stamped out and prosecuted if people are indeed getting information earlier than the market in general. Unfortunately ASIC and most regulators do not have the resources to investigate everything.

Aside from the above, imo, it is extremely, very, super difficult to profit from any form of market manipulation, possibly with the exception of a well executed pump and dump scheme


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## Trembling Hand (15 May 2013)

basilio said:


> TH you are so xxxxxxxxx disrespectful
> 
> All I can gather from your dissing of  mine or other comments is that




They don't make any sense and are very poorly argued, IMO. For example the nonsense about trading shares between yourself.

I think you will find that most people don't like short sellers, derivatives, leverage, large traders when they sell, rumours that don't go their way, bear markets, off market transfers, HFT, day traders, OS money, carry trades, educated investors, smart Hedgies, stocks that move before a screaming good ann, options, futures, etc etc.

Though none of that is illegal. We have a good legal frame work around our markets though the policeman could be better skilled and funded. 

But the real problem with our markets is that it hard to make money, isn't it?


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## basilio (15 May 2013)

A bit more about Market Manipulation. Does it actually exists ?

*Market manipulation and Corporate Finance. A  New Perspective*

This paper examines market manipulation in detail . In particular check out :
Page 201 Defines  and categorizes Market manipulation 

Page 202 Offers instances of Market manipulation. It Starts with the collapse of the Gold corner in 1869 and notes a range of instances up to Solomon brothers scandal in rigging US securities treasury notes  and a squeeze on Japanese banks in 1992. They detail 7 particular examples .

Pages 203-206 detail why and how Corporations can manipulate markets for their advantage  through action, information and the trading they do in securities. There are some excellent examples of how takeover strategies  can be used to  misinform markets to the advantage of particular interests

Page 207 details two  particular examples of  market manipulation in 1991 when  Steinhardt partners and Caxton Corporation acting in collusion concerned the US Treasuries 2 year notes market and then parked the notes in institutions that  were “unfriendly” to Wall st Firms.  Basically they were creating a  squeeze.
Solomon Brothers  also made false bids for US securities and rigged the markets for their advantage.


http://forum.johnson.cornell.edu/fa...et Manipulation Corporate Finance FM 1993.pdf


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## Trembling Hand (15 May 2013)

You havn't listed the biggest one EVER!!!! (Cue scary music)

And its not even a year old,

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


Though not sure what it has to do with this topic..... as it was clearly illegal.


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## CanOz (15 May 2013)

There are plenty of examples around where even big traders have not been big enough or good enough to move markets too, like Nick Leeson....

Then there are guys big enough to move some markets around, i.e. Paul Rotter, TH, etc...


CanOz


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## Trembling Hand (15 May 2013)

CanOz said:


> There are plenty of examples around where even big traders have not been big enough or good enough to move markets too, like Nick Leeson....
> 
> Then there are guys big enough to move some markets around, i.e. Paul Rotter, TH, etc...
> 
> ...





Hahaha!! In my dreams


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## basilio (15 May 2013)

TH I wasn't trying to list every major corporate scandal. That paper was just a good (but quite old) overview of how the markets had been corrupted.

But the interesting question is  *What should happen to people who participate in these activities ? * As far as I can see sanctions are light enough to ensure that the principals of these banks will take a calculated risk that either they won't be caught, or they can BS their way out, or that consequences will not be serious  enough versus the money they will make on the deals.

With regard to making money out of trading with  yourself.  In fact I was talking about share trading between related parties. If you go back to either the Wiki article or the paper I just tabled you can see how companies can create prices on the market through wash sales or churning.  

The original article I  referred to in the LNC energy discussion went into great detail highlighting the movement of shares between UBS and its affiliates. It is complex and if I was in UBS's shoes I wouldn't be laying a signposted trail for ASIC to follow.  But I suggest the research is worth respecting and deserves to be followed up. (If it has happened here then it is likely it will be done again.)



> The outstanding feature of UBS dealings has been broker net selling across nearly all trading periods. The net selling amounted to 14.275 million shares. Yet at the same time as substantial net selling has occurred through broker operations, UBS affiliates have recorded net purchases of 6.947 million purchases. In the period Jan 19 to May 16 UBS affiliates sold around 7.56 million shares more than what their broker put through the market but managed to accumulate 3.29 million shares. Their buying looks to have been done through other brokers however the situation raises crucial market integrity issues, particularly in view of the share price slump that occurred during the period.A similar situation occurred in the period May 19 to May 30 where heavy net selling by the broker again coincided with substantial net accumulation by UBS affiliates. The selling of shares by the UBS broking arm while UBS affiliates were building their holdings again raises concerns about the state of the market during a volatile period where the company was presented with a ‘please explain’ from the ASX.
> 
> The market data suggests that the company’s reference to an undervalued share price looks to be more
> the result of market forces brought about by broker activity rather than company specific issues. UBS becoming a major shareholder mainly through securities lending activity in itself would suggest that lowerprices were an expectation of the corporate positioning that has occurred. While profiting from shortselling can be a legitimate trading strategy any dislocation to share prices brought about by unfair dealings needs to be thoroughly assessed, particularly where accumulation of shares appears to be a primary motivation for the lowering of sharing prices. UBS disclosures are likely to be signalling what is occurring right across the ASX where extensive securities lending, large volumes of back and forth trading churn and the likely co-operation or collusion between brokers are common themes. Unfortunately any unfair trading that doesn’t trigger the 5% substantial shareholder reporting threshold effectively takes place unnoticed and is largely unaddressed by regulators.




http://www.scribd.com/doc/139929124/7-2-Further-Research-Into-ASX-200-Companies-Linc-Energy-LNC


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## Trembling Hand (15 May 2013)

basilio said:


> The original article I  referred to in the LNC energy discussion went into great detail highlighting the movement of shares between UBS and its affiliates. It is complex and if I was in UBS's shoes I wouldn't be laying a signposted trail for ASIC to follow.  But I suggest the research is worth respecting and deserves to be followed up. (If it has happened here then it is likely it will be done again.)




Oh dear you cannot be serious can you? You do know what a broker does?


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## basilio (15 May 2013)

TH what part of "collusion" don't you understand ?

The whole point of the paper I referred to earlier ( Market manipulation in US) was showing  how companies can  and do use related parties to manipulate markets. 

Somewhere along the line you suggested that if there was any concerted but unwarranted bear push on a stock other investors would  see an opportunity and buy in. 

*Bollocks!!* If one was a serious investor and saw a concerted short selling effort on a stock you would either join in or step aside and perhaps hope to pick a bottom. (if you were brave ) Only the exceptionally foolish would stand in the way of a serious dump.

I note that you are an experienced trader and you make the wry comment that it is so hard to make a dollar on the markets these days. I suggest you do some research on the number of large swings in individual shares as well as the larger market. My guess is that the big money these days is in creating sharp sells off and perhaps rises and making out in those events. (Perhaps that has always been the case..)

But along the way I suggest we have forgotten that the stock market should be (?) a long term tool for investing companies


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## Vixs (15 May 2013)

basilio said:


> TH what part of "collusion" don't you understand ?
> 
> The whole point of the paper I referred to earlier ( Market manipulation in US) was showing  how companies can  and do use related parties to manipulate markets.
> 
> ...




1. A 'concerted short selling effort' is not manipulation. It's a concerted short selling effort.

2. If the markets are a long term tool for investing in companies, then a short term dump that has NO EFFECT on the fundamentals of the business will have no meaningful  impact on the share price, as new analysis will show it to be mispriced and bought up accordingly. 

I believe you're talking about the actions of a trader, not an investor. An investor typically won't sell out and then try to catch the knife as it hits the floor - they might add to their position and average down if they have a strong conviction of future value, but people taking a long term view probably aren't trying to pick tops and bottoms.


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## skyQuake (15 May 2013)

basilio said:


> The whole point of the paper I referred to earlier ( Market manipulation in US) was showing  how companies can  and do use related parties to manipulate markets.




The market manipulation paper did give me a few good laughs, any sort of mischievous ingenuity resulted in (illegal) profits.
However, it looks like an ivory tower publication.



> http://www.scribd.com/doc/139929124/...inc-Energy-LNC




Pic worth a thousand words: 



LNC, WHC, GUF. Its a sector wide thing not just LNC...


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## sinner (15 May 2013)

skyQuake said:


> Pic worth a thousand words:
> 
> 
> 
> LNC, WHC, GUF. Its a sector wide thing not just LNC...




I posted a similar pic in one of the other (2, 3?) threads basilio has started about this.


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## Trembling Hand (15 May 2013)

basilio said:


> TH what part of "collusion" don't you understand ?




Basilio. You do know that a broker the size of UBS would have 100s of different funds and trading decks and clients and prop desks all doing different things. VASTLY different. All with clear and open objectives. Thats is why they are trading both ways in all stock all the time.


When we were cavemen sitting around the camp fire at night and heard a sound in the bush we would think "**** that is a Saber tooth tiger, I'm running". That brain function whether there was a tiger there or not saved us as a species.

Unfortunately it makes us crap investors, the sound in the bush has been replaced by adverse share moves and the first thing we think about is "bloody manipulators conspiring against my well-being".


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## basilio (15 May 2013)

I suggest we are getting off the topic again if we try to focus purely on LNC.  I suggest it is only an example of what appears to be happening to a number of stocks.

Sinner and Skyquake  have reproduced graphs to show the overall market situation Vs LNC.  In many ways a fair point. The market has been poor and many companies have been affected.  That doesn't necessarily mean all companies at all times should follow a trend does it ? I'm sure for example others can come up with quite sound reasons why particular companies still have a strong foundation and a good outlook - despite overall sentiment.

TH you point out that UBS have hundreds of brokers all doing different things.  So what is the possibility that one of those different things is a spot of market manipulation that happens to turn a good profit ? Is this impossible ? If you see what happened in the trading activities of other large investor companies absolutely not. 

Were you aware of one of the biggest deals that made money from the GFC ? One investor in particular  John Paulson, came to he decision that there would be a bust in companies dealing with CDS's. (Credit Default Swaps)  He believed the mortgages behind theses instruments were basically junk and that they would *inevitablely*fail.

So to make money on this he wanted to place a very large bet against the CDS's. At that stage there were no companies willing or able to take the bet.  The story is fascinating and is worth revisiting. 

But at the heart of the matter was the conduct of Goldman Sachs in helping create financial instruments that in effect would have them betting against their own clients. And you suggest this can't happen ?



> *
> Goldman Sachs investigation could put Wall Street under microscope*
> 
> • SEC looking into whether Paulson deal was one-off
> ...




http://www.guardian.co.uk/business/2010/apr/19/sec-questions-paulson-deal-unique
http://online.wsj.com/article/SB10001424052748703574604574499740849179448.html


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## Trembling Hand (15 May 2013)

basilio I'll leave you to it.



Good luck......


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## sinner (15 May 2013)

basilio said:


> So to make money on this he wanted to place a very large bet against the CDS's. At that stage there were no companies willing or able to take the bet.  The story is fascinating and is worth revisiting.




Aside from the idea of sticking to LNC, I am not sure you understand the trade Paulson took on.

Institutions, especially those with fixed payout costs, were reaching heavily for yield in the runup to the GFC. They were long CDOs, essentially a bet that house prices would continue to rise (because otherwise no amount of yield could justify the risk of capital loss on these assets). Yields were higher than the market average but not really reflecting of risk they were taking on because rated by the agencies as AAA (due diligence problems again from both investors and ratings agencies).

This means that brokers like Goldman Sachs, in facilitating the supply for demand of CDOs, were short CDOs against their customers longs. If their customers in aggregate are desiring to be net long, they have to be net short. It's a simple fact of accounting.

How do you hedge a short CDO position to ensure you're not exposed to any price and credit risk? You *buy* CDS against those CDOs.

Paulson was betting against CDOs, not CDS, two vastly different products. Being long CDS when your firm is net short CDOs, is not really a big deal. You are only really betting against your own customers if you're long CDS in a greater proportion than the firm is net short CDOs.


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## Zedd (15 May 2013)

Trembling Hand said:


> You think so!!
> 
> Zedd have you ever place a trade? Seriously! This is why this subject is just totally out their. Please!!




Eloquent rebuttal as usual TH. As the quote was at least a few pages into the paper I'm assuming you read some of it. Did you make it to the conclusion:

"The results presented above show that trade-based stock-price manipulation ... is consistent with rational utility-maximizing behaviour." A fairly concise summary of my POV. 

Your comment that I initially responded to suggested there was absolutely no way someone could profit from trade-based manipulation. I think this paper defines and proves that in theory it is entirely possible, especially in a market with limited information.  

Is there a flaw in their peer-reviewed model? Or do acknowledge the validity of the theoretical model but disagree with it's applications to the market? Do you believe that all areas of the markets have perfect information? What about trading algorithms? IMO they're a pretty good real world example of information-seekers as defined in the model... 

As to my personal background, I am neither a researcher/academic nor a trader but I have been investing for the past 15 years, probably up to a max of 10 trades a year, so very much still a hobbyist. The last 2 years I've been studying a Master of Business majoring in Applied Finance with the view to switch from my current career into finance as I think it would better suit my interests. I believe though that even with my formal education and market exposure, nothing competes with real world experience in the actual industry, something I clearly do not have.

And yet while my knowledge and experience may pale in comparison to your own is irrelevant to the fact that a mechanism exists for trade-based manipulation which none of your sarcastic comments or allusions to your level of experience negate.


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## basilio (16 May 2013)

Thanks sinner for the correction. I just reread the document  and as you pointed out,  saw my error.



> They met with bankers at Bear Stearns, Deutsche Bank, DB +0.87% Goldman Sachs, and other firms to ask if they would create securities””packages of mortgages called collateralized debt obligations, or CDOs””that Paulson & Co. could wager against.
> 
> The investment banks would sell the CDOs to clients who believed the value of the mortgages would hold up. Mr. Paulson would buy CDS insurance on the CDO mortgage investments””a bet that they would fall in value. This way, Mr. Paulson could wager against $1 billion or so of mortgage debt in one fell swoop.




What it does remind of was the more complete story of how John Paulson pulled his deal. He accessed Goldman Sachs mortgage accounts and managed to handpick what he could clearly see were the most likely to fail mortgages. These were the ones he managed to get Goldman Sachs to bundle and sell to their clients as AAA rated securities. 

I brought this point up to illustrate the (non existent) ethical standards of the finance industry.  It also demonstrates their capacity to dream up more and more obscure financial instruments to enable people to bet against.  I believe it is George Soros who has said that the financial derivatives market is a just a time bomb.

But back to the theme of this thread. Should these instruments be allowed ? What do they achieve ? What are the risks ?  Given the central role that financial institutions play in keeping commerce going is it just too great a risk for all of us to allow unfettered freedom to these particularly creative and ethically challenged people ?


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## sinner (16 May 2013)

Zedd said:


> And yet while my knowledge and experience may pale in comparison to your own is irrelevant to the fact that a mechanism exists for trade-based manipulation which none of your sarcastic comments or allusions to your level of experience negate.




The point is that a *theoretical* mechanism exists, in reality, every day in the markets, it's not like that at all. Theory is very very very far away from reality. This sort of manipulation is only ever going to be remotely effective in markets where there is an expectation of liquidity, and that liquidity has been withdrawn! Everywhere else, all the time, theory is the opposite of reality.



> But back to the theme of this thread. Should these instruments be allowed ? What do they achieve ? What are the risks ? Given the central role that financial institutions play in keeping commerce going is it just too great a risk for all of us to allow unfettered freedom to these particularly creative and ethically challenged people ?




I'm with TH and leave you to it at this point, as it's not so much a discussion as


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## CanOz (16 May 2013)

basilio said:


> Thanks sinner for the correction. I just reread the document  and as you pointed out,  saw my error.
> 
> 
> 
> ...




This thread has changed from a theme of market manipulation in the auction markets to market manipulation and fraud in the Banking industry....

The latter is serious and was arguably responsible for the largest transfer of wealth in history....

CanOz


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## Zedd (16 May 2013)

sinner said:


> The point is that a *theoretical* mechanism exists, in reality ... theory is the opposite of reality.




I realise that I've bastardized your quote but it summarises what I felt it added to the discussion. 

While I don't think "reality" is the correct term, I agree that trade-based manipulation is only effective under certain scenarios. Much the same as insider trading, or information-based manipulation can only occur in certain scenarios also. In a largely-efficient, well-informed market these scenarios should be rare.

Again, my initial response was putting forward a theoretical response to a question about possiblities - to me that makes sense, if you want to consider if something is possible, you first start by considering possible theories, not blindly searching through mountains of data.

I appologise if this feels like . I'm genuinely interested in responses, especially from expereinced traders or investors. Unfortunately I consider statements like 'in the real-world', without elaborating further, to hold considerably less weight than a peer-reviewed paper. 

If you want to use your experience as evidence/argument than perhaps a different approach would be to explain why such manipuation couldn't possibly affect your trading strategy personally. I'm learning, slowly, about different TA methods. It seems to me that there are a number of methods that would be susceptible to trade-based manipulation.


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## Trembling Hand (16 May 2013)

Zedd said:


> I'm genuinely interested in responses, especially from expereinced traders or investors. Unfortunately I consider statements like 'in the real-world', without elaborating further, to hold considerably less weight than a peer-reviewed paper.




Peer review isn't worth the paper it written on if its not based on real events. The trouble with your experts is that they actually are not anywhere near experts. They actually have NO experience. 



Zedd said:


> If you want to use your experience as evidence/argument than perhaps a different approach would be to explain why such manipuation couldn't possibly affect your trading strategy personally.




I actually did. With this example. here


I have today traded stuff thats , my guess, 200 times their annual wage that they get "paid" to write this crap. Virtually all has been AGAINST idiots trying to push the extremes. How much do you think your experts with their peer reviewed papers have traded? How much have they made from their "theoretical" example. I'll have a pretty good guess and say ZERO.


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## skyQuake (16 May 2013)

Zedd said:


> I realise that I've bastardized your quote but it summarises what I felt it added to the discussion.
> 
> While I don't think "reality" is the correct term, I agree that trade-based manipulation is only effective under certain scenarios. Much the same as insider trading, or information-based manipulation can only occur in certain scenarios also. In a largely-efficient, well-informed market these scenarios should be rare.
> 
> ...




I understand where you're coming from. Ranking a peer reviewed paper above strangers on the interwebs.

However trading and investing is a field where no formal education exists, anyone competent enough aint writing papers, but making real money. Consider for example the CAPM or the Efficient Market Hypothesis which were peer reviewed.
Thus the general disregard for academia and "theory". 

The reason why this particular theory fails is that 1) Most stocks are not in equilibrium. 2) The manipulator does not know who/what is behind any particular move - it could be an informed investor, or it could be passive funds, could be algos. ie. there is imperfect information, and there is generally someone bigger that knows more than the manipulator and will see his actions as free money.

Take MBN for example. 




Say the manipulator took an interest at 30c. What would he do?
a)Manipulate the stock up as to fake a breakout? In hindsight it wouldn't work because there is a large insto seller that would be happy to get better prices. The manipulator's volume would be absorbed and now he has to get out, and compete with the insto seller.
b)Manipulate the stock down? First he needs to establish a short position, which means he will fight the insto for liquidity, aggravating the downmove and giving him a crappy fill. Then manipulate the stock down some more? What if it turns out the insto is actually done selling? What if the insto crosses the last dredges of its sell to some big holders who also start buying stock? 
c)If he's really clever he'll try create some kind of break from the downtrend by aggressively buying. Then as punters pile on, he'll sell what he's bought and establish a short position, hopefully while the stock is still up, and hopefully his aggressive buying wasn't absorbed the insto's even more aggressive selling. 

imo scenarios b) and c) the manipulator is more of a swing trader.

The hindsight that revealed the big insto trailer is the 46mil share crossing early May at 16c. That was the end of the insto selling so to speak.


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## Zedd (16 May 2013)

skyQuake said:


> The reason why this particular theory fails is that 1) Most stocks are not in equilibrium. 2) The manipulator does not know who/what is behind any particular move - it could be an informed investor, or it could be passive funds, could be algos. ie. there is imperfect information, and there is generally someone bigger that knows more than the manipulator and will see his actions as free money.



I completely agree that there is *generally* someone more informed, or bigger to invalidate any attempts to manipulate. I have never once disputed that.



skyQuake said:


> imo scenarios b) and c) the manipulator is more of a swing trader.



By definition if they try to change the market through a trade they're a manipulator. If at any time someone places a trade, or even makes a statement on somewhere as insignificant as a public forum, with the intention that their action causes a market reaction it's market manipulation.

I'm still a little surprised that my initial comment led to such a discussion as I assumed that everyone acknowledged it was theoretically possible but in practice rare. I personally believe there are some individuals operating on the fringes of markets profiting off pump and dump methods of very spec. stocks, but don't buy into the conspiracy that large institutions are. If you think this is paranoia so be it. 

Where I thought this thread was going to go was more along the lines of unintentional market manipulation by large institutions and whether certain practices should be regulated/limited to prevent this. Kind of along the conceptual lines of breaking up banks before they get too big to fail. ie. If an institution's activities are so large, relative to the market they're operating in, that it moves the market away from it's "fundamental value" then is this against the fundamental principles of a market, is it manipulation and should something be done?

I would have thought this was an interesting question, and something that those with industry experience could weigh in on. Personally I was planning on watching that discussion from the sidelines as I don't have nearly enough understanding of the day-to-day balancing of accounts/shorts/derivatives etc. to comment.


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## skc (16 May 2013)

Zedd said:


> By definition if they try to change the market through a trade they're a manipulator.




Is this the right definition for market manipulation? If someone is placing a trade in the market, they are putting their capital at risk and is on the exact same level playing field as everyone else. They do not gain an unfair advantage. 

They do not know beforehand that someone else will assume their action as more informed and hence follow suit.
Whether their intention is to cause a market reaction is irrelevant. If you chooses to make a decision based on the action of others - who's responsible? 

Not to mention it is also impossible to police this kind of "manipulation". An insto just sold 20m shares... unless the trader documented their intention, their action is completely indifferent whether they are trying to "manipulate" the market or are just trading to sell in a hurry.

Indeed, if you are a long term investor, a market manipulator (by your definition) should be your best friend. If they push the price down irrationally you get to acquire cheap stock. If they push the price up irrationally you get to exit above fundamental value. 

I agree things like deliberate false information or rumours are manipulation, as well as any false market activities (e.g. trading amongst associates). But these activities are already illegal AFAIK.


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## Zedd (16 May 2013)

Definition holds where the intent is to manipulate. Questionable as mentioned before as to whether unintentional reactions can be considered manipulation. You've touched on a separate issue though which is - "Is all market manipulation bad?" Similar argument with insider trading. Insider trading allows more information to be incorporated into the price so is arguably creating a more efficient market.

I think it's a question of magnitude of effect on perception and operation of the market.


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