Market Manipulation (March 8, 2007)
Knowledgeable reader Rick R. sent in a question which occurs to all of us who trade stocks: Is this stock being manipulated?
I have long suspected widespread manipulation in the equity markets and have a question for you. This evening I noticed something I've never seen before in my many years of trading. The afterhours charts of many market moving NASDAQ issues are painted with extreme readings - in all cases, wildly moving, impossible to trade movements that effectively render technical indicators useless. I've enclosed two charts as examples - note the range of the price channels in each. Other charts look much the same across the NASDAQ landscape.Since many readers (including Rick R.) are far more experienced traders than I am, I sent the question to frequent contributor Harun I. for his comments:
The fact that these bars appeared in multiple securities at the same time could mean the vendor’s software may have had a problem. Also check what kind of volume was trading, during light trading the markets are easy to push.I then sent Harun's comments to Rick, who confirmed that the peculiar chart action did not appear to result from software errors:
I spotted many charts - both NYSE and NASDAQ with the same patterns. For several, I drilled down to 5 and 15 second intervals, looked at the tape, and they appear to be valid trades. However, I have contacted my vendor (e-signal) as I trade quite a bit and I've never seen this activity before.Here is my two cents (adjusted for inflation, 2-tenths of a cent): I too have noticed some very high-volume after-hours trades recently in biotech stocks I follow. Over 10% of the daily volume traded hands AH, 150,000+ shares, where normal AH volume is a few thousand shares, if any. Suspicious? Consider the chart of the BTK, the biotech index:
Nice little downtrend--especially if you're accumulating positions. My own sense is this: an established biotech rises in the course of trading, and then BAM, it gets slammed after-hours on no news. It opens weak, hitting stops (pre-established "sell" orders), allowing "smart money" to continue building a big position at bargain rates. The weakness keeps the price just below levels which traders are keyed on--support, resistance, Fibonacci retraces, and so on--so traders stay out of the stock while the "smart money" builds a position.
Then, once their position is complete--let's call it 2 milion shares--then the "nudge" goes the opposite direction. Our "smart money" loads up on call options, alerting traders that something bullish is at work; if the bid/ask is $20 and $20.05, then our SM puts some big buys at $21, then $22, and $23. The bid and ask quickly jump up, lighting up trading screens everywhere because resistance has been overcome and a "bullish move" is now obvious.
Now the uptrend feeds on itself. Traders looking for momentum moves spot the stock, and their buying pushes it to $25. Short sellers start covering, adding a rush of new buyers, and as the stock pushes up various trading triggers--Fibonacci levels, bollinger bands, money flow, and so on--then more "momo" traders jump in. Our SM waits until the stock pushes up against its previous high--let's say it's $30--and then "paints the tape" at the close with some big buying in the last few minutes of the day, pushing the price to a nominal new high.
The next day, the SM repeats the exercise, pushing the stock to a new high, even if it's only a few pennies. After three days--traders look for three days of up or down price action to set a trend--those who look for breakouts to new highs (the Investors Business Daily crowd) now jump in, and the stage is set for the SM to begin unloading the calls and stock position--"distribution." Once they've dumped the 2 million shares--slowly, so as not to move the market--then they short the stock--buying shares they don't own, to be covered later at lower cost when the stock falls of its own weight. Manipulated up, manipulated down--the game works in both directions. Pity the poor "investor" who naively believes in the transparency of markets.
Doesn't happen? You bet it does. In Harun's succinct summary:
How many retail traders are willing to buy an inactive security? The fact that the public often gets aboard late in the game ( the speculative phase or worse, the distributive phase (top)) should at least help explain some of this game. For strong hands that bought (accumulated) the stock, to realize any gain the stock must move in their favor to be sold (distributed) at a profit. From whom did strong hands buy, when and why? And to whom are they going to sell, when and why? People need to think critically about the terms accumulation and distribution.Thank you, Rick and Harun, for your commentaries on this important topic.
As a lagniappe, here is a succinct article on the PPT, the Plunge Protection Team, forwarded by astute reader H.S.K.: Juicing the Stock Market-- The secret maneuverings of the Plunge Protection Team.
For more on this subject and a wide array of other topics, please visit my weblog.
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