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Market Manipulation: How It Works (December 4, 2006) Astute reader David S. recently noted the astonishing way the stock market manages to close up (or recover sharply) in the last hour of the day. Something I've noticed this week with the stock market that sure makes me think someone is manipulating the indexes - example is today - the Dow, Nasdaq, and S&P were negative most of the day but then shortly before the market closed the Dow and S&P rose to end the day positive which causes ridiculous headlines like this: Dow Rises to Another Record High (Yahoo News) 
I agree, and I can easily surmise how this kind of manipulation works. Is it a conspiracy? No, just plain old simple human greed in action. First, let's establish that it doesn't take that much money to move any of the U.S. markets. The New York Stock Exchange, for instance, trades on average 1.7 billion shares a day or about $75 billion in dollar volume, about evenly matched in buys and sells. Let's say you manage $10 billion in OPM (other people's money). It's not that large a figure anymore--some families of funds manage over $100 billion. Hedge funds managing $5 billion or more are a dime a dozen. Your bonus depends on beating the market as of 12/31--or at least getting close to what your long-suffering clients could have earned by investing in a low-fee index fund. Your bonus could run upwards of $10 million or more, so this is a non-trivial game to you. Now let's say you and a few of your golfing buddies reach an understanding--not any collusion which could be proved, or recorded, just a "conversation" on the links--that each will buy $1 billion in the last hour of trading if the market is down. $7 or $8 billion just isn't much money in a $12 trillion economy or in a $6 trillion market, but it's more than enough to move the market in a major way if it's all buys or all sells. Let's further suppose that your old Wall Street acquaintance Mr. Paulson (now Treasury Secretary) had a pal call and hint that it would be a darned shame if the market dropped for three days in a row, because, well, technicians know that three days in row makes a trend, and we wouldn't want the Great Unwashed Investor to think the market was in a downtrend. Why? because you and your insider pals are selling like no tomorrow, and they need the market to stay up until they've liquidated their own shares. Here's a story from CBSMarketwatch stating that insider selling has jumped: Market warning from those in the know Muzea sees steeper declines based on lack of insider buying (11/27/06) If George Muzea is right, Monday's decline is just the start. Muzea, who runs Reno-based Muzea Insider Consulting Services, has been negative on the market for just two weeks -- the first time he has been bearish since July 24, when he turned positive. Muzea makes market calls based on the activity of corporate insiders. He's considered the grandfather of the insider-tracking industry, generally keeping a low profile to all but his high-paying hedge fund clients. But, according to Muzea, this is likely the beginning of a sharp and steep decline not unlike the one that hit the market last spring -- and maybe worse.So why does the market jump in the last hour? Because insiders are goosing prices with other peoples' money while they turn their own shares into cash. Another way of putting this is: if you could manipulate shares in a company so you could exit with a fat profit before it sank like a stone, wouldn't you do so? Come on, be honest--we all would. But only a few people have that ability, and to claim (with zero evidence) that the "markets are fair" and "manipulation is impossible" is to be either uninformed about the relatively small size of the daily trade or naive about just how few people would be needed to push the market up or down. Not only that, but as a pro you know the technicial levels you need to defend or punch through to trigger "black box" (computer) buying or selling. For instance, on Friday, December 1, the Dow Jones Industrials sank 130 points. But miraculously, in the last hour of trading the index jumped 100 points to 12,194. Support in the DJIA is 12,195, so the boys almost made their number, retrieving the index from a close below 12,100 (another support level) almost back up to the 12,195 level. Once you've liquidated your own long positions, then you can go short and start unloading your funds' shares before the deteriorating market becomes too obvious to ignore. Then as panic selling sets in, you reap immense profits on your short holdings, and put your clients' money back to work at the bottom, after the retail crowd (the average investor/gambler) has sold for a loss or miniscule gain. Then the game starts all over again. Don't think this is plausible? Then please explain why 4 billion shares traded hands on November 30--over twice the daily average--and yet the market swung from a 90 point loss to a 90-point gain and then ended with a tiny 5-point loss. With massive buying driving the index up almost 200 points from its low of the day, who sold it down for a loss at the close? Simple: the right hand bought with Other People's Money and the left hand sold its own shares. Now that the insiders are out, the market can fall. Don't believe this? Just watch the action over the next two weeks. For more on this subject and a wide array of other topics, please visit my weblog. 
copyright © 2006 Charles Hugh Smith. All rights reserved in all media. I would be honored if you linked this wEssay to your site, or printed a copy for your own use.
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