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

Look into the clearing process for stock trades too.

The Fed lends money when the parties clearing trades fail to deliver either the stock, or the money for the stock.

As far as I know there is NO public record on the amounts, or changes in amounts, of this lending the Fed does.

All the Fed would need to do to manipulate the markets is to tell any of their member "banks" (the former investment banks would be the likely suspects) to "buy" or "sell" (short naked), to move the market up or down, and the Fed could then "pay" for the trades with loans during the clearing process.

Considering some of the strange price swings I've seen in the markets/stocks recently, I'm fairly well convinced that the government is actively involved in direct manipulation of the stock market.

I cannot "prove" anything, but considering things like the bailouts of the investment banks, and the re-writing of accounting rules to allow the financial firms to "pretend" they are profitable, it is pretty clear that the government and certain Wall Street insiders are "in bed together."

They are not the only people that "got it so wrong" ask the people that told us there were WMD in IRAQ.

it really is the ultimate ponzi scheme. Makes madoff look like a boyscout

The PPT theory has been around forever. One of the former strategists at my former firm was a huge PPT conspiracy theorist, he went on about it for years, but never produced any evidence, not even weak evidence, that the govt intervenes in the stock market. (That guy did more damage to our investment results than any other single person, BTW. He was so obsessed with his conspiracy theories and end-of-world scenarios that he impeded actual stock-picking.)

The violent short-term up moves in the market are usually traceable to short-covering, futures trading, and index/ETF buying. Look at the short interest right before those moves and you'll usually see very elevated levels, also usually see high VIX and high put-call. Means a lot of people have big short positions on. Most short-sellers (hedge funds, etc) have extremely short investment horizons - weeks or even days - and will stampede to cover when the trade turns bad. Any whiff of positive news, or even news that is less negative than feared, can set off a short-covering rally in those situations. When I look at stocks, I usually view high short interest as a positive (for a long). Means a lot of negativity is already embedded in the price.

I have not looked into the Fed-orders-banks-to-buy-and-funds-with-loans theory. But consider the enormous sums involved. Avg daily dollar volume on NYSE is around $50BN. Avg daily dollar volume on NASDAQ is similar. Add another $10BN avg daily volume on other exchanges and so-called "dark" trading (I imagine that is low). That's $110BN average daily volume. Suppose the Fed ordered banks to buy, representing 10% to 20% of that, that is $11BN to $22BN that the Fed would have to lend that day or the next. Do that a few times, and you've got a $100-200BN balance sheet item. That would be sizeable relative to the Fed's balance sheet - remember that prior to 2008 the Fed's balance sheet was only about $800BN - and that balance sheet is reported weekly. I think that, over the years, determined conspiracy theorists would have detected such PPT activity on the Fed's balance sheet, e.g. found a pattern of sudden balance sheet expansion around sharp market rallies. I haven't heard of such a finding. Now, could you manipulate the market by trading much smaller sums, e.g. buying just the futures, or just some marquee stocks? Maybe you could trigger a short-covering rally with only, say $1BN of trades. But in that case, there's no need for the govt to do it - the big investors could move the market on their own (indeed, I think they do) -and that's simply the free market at work.

I would be very interested in more info that you have, or find, about this.

Thanks John. Given how little most people know about real economics, it's not surprising that they have an even smaller understanding of how the markets work. If they did, most of us would rarely, if ever have a friend/relative/co-worker stopping by to give us their favorite stock pick which will make us rich. They'd understand that the whole market is constantly being sliced, diced and analyzed too many ways by people who are buying,selling,shorting or arbitraging just about everything.

So if someone feels that XYZ corp's stock is the next hot pick to buy, what they most likely don't realize is that the following actions are going on...

• There are a bunch of people shorting the stock at that moment -- often with good reason.
• There are insiders trading based on information that our hypothetical tipster doesn't have.
• There are technical analysts who are watching the stock's movements and trading on more up-to-date trading information then the tipster has available.
• There are fundamental analyst who attends the analyst calls for all of the related companies in the industry, including XYZ's, and has access to analysis from other analysts, and who spends his/her life tracking XYZ and similar companies who is trading based on of that information. He'll know things like what XYZ's suppliers are doing, what it's customers are doing as well as such important details as when key patents will expire.
• There are arbitrage traders who trading based on the spread of this stock to other stocks, bonds, commodities or derivatives (or combinations thereof). This is often done via program trades which execute over a matter of minutes or even seconds.
• Finally throw in a few wild-card speculators who are just making wild-assed bets.

The summation of all of this information rolls up into the current stock price. If you really think that you can "out bet" all of that -- go right ahead. But don't expect to get ahead just because your cousin Vinnie got a hot tip.

Sorry, I call BS on the market being a completely free market economy. Institutional buyers, hedge funds, short sellers,market makers all exert as much influence as possible to effect movements in stocks. That is not free market economy when they can manipulate the market in such a way. Remember, brokers make money whether you're selling or buying. They just need to get the lemmings spooked and running. Equilibrium theories do work, sooner or later, given sufficient supply, the price one is willing pay will diminish and therefore in an effort to induce demand, prices will fall until the desired velocity is obtained.

What you have described is all part of a free market. There are big guys and there are little guys, and everyone does everything they can to make money by any means legal in any time horizon they choose.

Unless you want your "free market" to be regulated so that only sweet little grannies can own stocks and everyone is commanded to invest for the long term.

That's a great description.

All of this economic theory doesn't take into account massive criminal behavior.
In the quest for a quick buck, loans were made to people with no hope to ever repay these mortgages.
It was well known by the folks involved what would happen, but a quick buck made it ok.
Brokers made their fees and passed on these toxic loans.
Others making money passed these toxic loans upstream.
Finally these toxic loans were mixed in with otherwise good loans and sold with the blessing of rating agencies paid off to give these packaged securities good ratings. More crooked behavior.
Everyone involved was hoping to pass these poor investments on to the next guy and not get caught unable to sell to the next guy.
Further the SEC sat on their collective a$$'s rather than do their job.
Same goes for the credit card companies; rushing to offer massive credit to folks, while ignoring the 500 pound gorilla, the growing mortgage default rates.
It doesn't take a rocket scientist to see the unsustainable rising home prices, combined with predatory loan companies, with zero government over sight.
Let's not forget the crooked CEO's that looted their respective companies while their boards of directors closed their eyes.
All was cool as long as key people got their money.
I got out of the market when the Dow hit 14,000.
I went to an all cash position, while many were saying "cash is trash".
I suppose my 2 semesters of economics must have been just a little better than the $2,000 dollar silk suit types that said stay in the market.
Pick any economic theory you like, unchecked criminal behavior, along with an administration asleep at the wheel, will destroy the system.

Nor does economic theory consider massive worthless counterfeit currency, the extent of which cannot be calculated.

"All of this economic theory doesn't take into account massive criminal behavior. "

- are you sure?

I'd bet someone has done this.

Hey Webb,
I'm all ears. Tell us about it.

quote "All of this economic theory doesn't take into account massive criminal behavior. "

- are you sure?

I'd bet someone has done this." unquote

I read your comments last week, but didn't have time to reply. I wanted to say a few things.

Your suggestion that it would require "billions" of dollars to manipulate the markets -- because the "daily value" of stocks being traded is in the tens, or hundreds, of billions -- isn't necessarily true.

Just as "price" in the supply and demand equation for goods and services is determined at the margins, so too is the price for stocks (and thus the whole stock market) is determined by the marginal buyers or sellers.

At any one point in time, if there are 100 people who want to each sell 100 shares of stock ABC at $100, and at the same time there are 100 people who want to each buy 100 shares at $100, the stock price will remain at $100. The market for ABC is in "equilibrium."

If one more person enters the sell side, seeking to sell just one share of ABC, that marginal seller will create an imbalance in the supply-demand equation for ABC, and the stock price will move downward. If one more person enters the buy side -- again, just seeking to buy one share -- the equilibrium will be disrupted and that marginal buyer will drive the price higher.

Overall, the "market size" for ABC, while in equilibrium, is $1 million (100 buyers/sellers each selling 100 shares @ $100), yet one seller or buyer with $100, seeking to buy or sell one share of stock, is the force that "moves the market" from its equilibrium.

If you understand how markets are "moved" by the actions of the marginal players, you understand how a Plunge Protection Team (PPT) -- if it exists -- would not require the billions of dollars you imply. The total market daily-trading dollar-value, even when it is in the tens, or hundreds, of billions of dollars, can be moved up or down with relatively small amounts of money placed at the margins.

I would also point out that money represents the ultimate in "fungibility." While one can certainly argue that a "conspiratorial, secret, PPT" may not exist, one cannot deny the bailouts of the investment banks still represents a bailout of the stock market.

The investment bank's trading desks would have needed to close their stock positions (most of them were/are intimately involved in "controlling" daily prices with their market-making roles) if the firms had been allowed to fail/contract due to their other losses (e.g. mortgage-backed securities losses).

Because of the fungibility of money, the government/Fed's role of buying/loaning against the junk paper of the investment banks has been an action which has moved the stock market artificially.

There is no doubt there is "PPT behavior" by the government. While it may not be overtly secret, it is not understood by many of the market's participants, so in many ways, it is a "hidden hand" moving the markets and makes the stock market a lot less "free" than some think.

Hi C1.

Stocks are not usually that sensitive to marginal trading. Institutional investors pay a lot of attention to executing their trades without driving the price away, and are able to move a lot of stock without impacting price by more than 1%. The market is that liquid.

Conceptually, the reason is that there are not simply the 100 buyers at $100 and the 100 sellers at $100. There are also buyers and sellers waiting at different prices. At $105 there are 80 buyers and 120 sellers, at $110 there are 40 buyers and 150 sellers. At $95 there are 120 buyers and 80 sellers, at $90 there are 150 buyers and 40 sellers. And so on. So, if marginal buyer #101 comes in at $100 and the stock moves to $105, 20 new sellers come in and 20 other buyers drop out, which swamps that one marginal buyer.

My job is still inconviently preventing me from spending time educating you guys on matters of economics, politics and social policy.

My job is still inconviently preventing me from spending time educating you guys on matters of economics, politics and social policy, ;) but I did read the opening post above and must comment. I disagree completely. One of the most refreshing characteristics of the study of Economics is its humility. Of course, you guys have no justification for being humble :rolleyes: but Economists (at least the ones I have known) are very circumspect about their discipline. One of my degrees is in Psychology, and I found the opposite there. Psychology takes the completely unsupported position that it is a SCIENCE. As if...... For this reason, I left psychology. Until that discipline cops some humility and recognition that it is a social science and not a 'hard' science, I will continue to scoff.

Back to Economics. The most fundamental joke in Economics is the wide range of opinions and asssertions. My Economics professor began to read a T/F quiz question to class one day........"Economists agree that........." and he stopped reading. He said "This is obviously FALSE."

Economics is indeed a social science. And it knows that. Amateur Economics might miss that detail, but actual Economists are not as arrogant as the amateurs.

I admit that i am a rank novice in economic matters, but i find myself in total agreement with Supe, especially wrt psychology.

Thanks jyl, I was just about to explain that when I saw that you already did a very concise job. The only thing that I would add is that the equilibrium in the market place looks kind of like this...

V - This is the supply of sellers
^ - This is the supply of buyers.

The market of buyers and sellers meets at the point in the middle. This is the current price. You can see this all the time on eBay. If the selling price goes up (because of increased demand), sellers come out of the woodwork. If the selling price is dropped (because of an excess of sellers) then buyers will start popping up.

What you are saying about liquidity is really unrelated to what I am discussing regarding the marginal buyer/seller being the "price mover."

Yes, in the stock market there are additional buyers/sellers ready to come in and take positions in a security at a different price above or below the current equilibrium price, but this is true for all things traded (economists usually study this action looking at goods/services). These additional buyers/sellers at new price points is precisely what the supply and demand curves represent when a market for a good is being depicted graphically.

Liquidity is nothing more than a measure of the quantity available of the "good" (or "stock" for our discussion) during a price shift and the speed with which price equilibrium is reestablished.

Liquidity does not eliminate the fact that the marginal buyer/seller is the action that moves the price.

The area of "market-making" (or "specialists") in the stock market is utilizing the same principles any Plunge Protection Team (PPT) -- if it exists -- would be using. They are not required to "own" a huge percentage of the market in order to influence price actions. They take advantage of the influence they can make by being the marginal buyer/seller counter to immediate market forces which may be causing the price to shift up or down when another marginal buyer/seller is influencing the market.

The difference between any PPT and a market-maker though, would be that the market-maker is expecting to profit from his actions while a PPT would represent a blatant manipulation of market prices. The market-maker is using short-term market pressures measured against the longer-term equilibrium prices to engage in effective short-term "contrarian" trades and (hopefully) turn a profit.

A PPT would represent a form of "price controls" with the taxpayer -- or Fed's "printing press" -- paying for any losses incurred during trading.