Market Manipulation

[Shaun @ Tru6]

The stock market tumbled on Monday based on news from Japan and a lower than expected jobs report. The latter I thought would be a plus so the Fed could lower interest rates on a cooling economy. There is a ton of money waiting to be spent when interest rates come down to a more reasonable rate.

But whatever the cause, given the software sophistication employed today, how easy would it be for one big player to see the cause and amplify the trend? Others would join in and all of sudden there's a huge market drop. Those with money to burn and having a proper longterm outlook would go on a buying spree creating even more wealth.

Possible? Doable? Science fiction? What do you think?

[Paul T]

Originally Posted by Shaun @ Tru6

The stock market tumbled on Monday based on news from Japan and a lower than expected jobs report. The latter I thought would be a plus so the Fed could lower interest rates on a cooling economy. There is a ton of money waiting to be spent when interest rates come down to a more reasonable rate.

But whatever the cause, given the software sophistication employed today, how easy would it be for one big player to see the cause and amplify the trend? Others would join in and all of sudden there's a huge market drop. Those with money to burn and having a proper longterm outlook would go on a buying spree creating even more wealth.

Possible? Doable? Science fiction? What do you think?

Read "Flash Boys" by Michael Lewis. Retail investors have been getting screwed by institutions for long, long time....another reason why active trading for the average Joe is a losing proposition.

[Tobra]

Easy

[Dixie]

The idea sounds riveting, doesn't it? The principal problem is you'd need a host of people to keep their mouths shut, and that's not going to happen. That said, automated algorithmic trading does exist and can have a significant impact on market prices.

This was first apparent on Monday, Oct 17, 1987, when the market crashed by over 22%. The crash, known as Black Monday, was attributed to automated trading amplifying panic trading. One change implemented after Black Monday was the introduction of circuit breakers in trading. If the market, or even individual stocks, gain or lose too much value those individual stocks, or the entire market, are halted.

The net is, what you're describing exists in a way, but it's not covertly done by some nefarious organization.

[speeder]

The big players are trading using AI algorithms and have been for some time. They can also potentially make as much when the market goes down as when it goes up. They make it coming and going. If you really care, you could educate yourself on this. Or not.

[917_Langheck]

The tragedy is believing that the stock market is somehow reflective of the economic "market"; it is not. It is a casino.

[masraum]

Originally Posted by Paul T

Read "Flash Boys" by Michael Lewis. Retail investors have been getting screwed by institutions for long, long time....another reason why active trading for the average Joe is a losing proposition.

Yep, it's a good read. Some of the info in it is dated, but latency, is still one of the driving factors. If a trading business does business in the Chicago area and the NY/NJ area, then they'll need data circuits between those two locations. When they shop data circuits, latency of the circuits will usually be one of the primary characteristics that is shopped, and the difference can be a couple/few milliseconds or sometimes less/nanoseconds.

Originally Posted by speeder

The big players are trading using AI algorithms and have been for some time. They can also potentially make as much when the market goes down as when it goes up. They make it coming and going. If you really care, you could educate yourself on this. Or not.

Yes, rather than HFT (high frequency trading - what it was called in the day), these days it's called algo-trading. Most of the time the amount of money made per trade is tiny, but there's a LOT of trading. You can imagine it like the old movie "what happens to the fraction of a cent from each check? What if we could funnel all of those fractions to an account?" The key is that a lot of trades and a lot of money goes through every day and the amount made each time is small.

Algorithmic trading LOVES a volatile market. They don't want a market that's steadily down or steadily up. They want a market that's volatile.

https://www.investopedia.com/articles/active-trading/101014/basics-algorithmic-trading-concepts-and-examples.asp

[Superman]

Watch "Trading Places."

[Shaun @ Tru6]

Originally Posted by Superman

Watch "Trading Places."

[Shaun @ Tru6]

Originally Posted by Paul T

Read "Flash Boys" by Michael Lewis. Retail investors have been getting screwed by institutions for long, long time....another reason why active trading for the average Joe is a losing proposition.

Thanks Paul, I'll add it to my list, I'm sure I'll enjoy it.

Way back in 1999 I was a programmer working at a boutique firm that did custom apps for the F500. The NYSE contacted the owner and they had several meetings, we were never told what they were but he did say the company didn't want to get involved in anything they wanted created which he said was on the sinister side of things. I would love to know what it was.

[tdw28210]

Originally Posted by Superman

Watch "Trading Places."

Great flick.

[Dixie]

Originally Posted by Shaun @ Tru6

...but he did say the company didn't want to get involved in anything they wanted created which he said was on the sinister side of things. I would love to know what it was.

Probably to aggregate fractional pennies into a secret account. And please ensure you submit your TPS report on time.

[Shaun @ Tru6]

Originally Posted by Dixie

Probably to aggregate fractional pennies into a secret account. And please ensure you submit your TPS report on time.

LOL!

Another great movie!

[creaturecat]

as easy as it is to manipulate upwards - via stock buy backs.
same methodology,.in reverse.

[masraum]

Originally Posted by Shaun @ Tru6

LOL!

Another great movie!

I love the movie, but my favorite part is the bit mostly in the middle where Peter just doesn't give a damn because the hypnosis is in full effect.



Although the whole thing with Milton was also pretty awesome.

[Superman]

Also Gamestop. Remember that?

Market manipulation happens all the time. If Shaun wonders whether this scheme will manipulate stock prices, then what are the chances that someone else asked that question, tried it, and figured how to make it work? What are the chances of that?

[zakthor]

Market manipulation? The entire stock market? Are your spidey senses tingling?

I read a paper: the better informed and equipped the traders are the more chaotic the marjet becomes.

I laugh when i hear daily stock news: as if anything the market does day to day makes sense. We humans like a solid narrative?

[908/930]

Originally Posted by Superman

Also Gamestop. Remember that?

I was just thinking about Gamestop.

[jyl]

Not market manipulation. A whole bunch of professional traders just got forced to liquidate a whole lot of positions in a hurry, because the yen carry trade blew up.

Japanese interest rates have been near zero, so a trader (not really a retail trader, think institution) could borrow 160 JPY for less than 1%/yr, sell it for 1 USD and use that dollar to buy a Treasury bill paying 5%/yr. If more aggressive, buy US stocks, bitcoin, Mexican short term bills, etc. That is called a carry trade. Lots of institutions made lots of money on this trade. Of course they are borrowing 1.6 billion JPY, not 160. Total size of the yen carry trade, in this and other forms, was about USD 4 trillion - per some estimates, others think more.

Unfortunately for them, Bank of Japan has been talking about raising rates which would strengthen the yen, the Japanese govt has been intervening in FX markets to strengthen the yen, and the US Federal Reserve is going to start cutting rates which will tend to weaken the US dollar. Then last week there was some weak economic data in the US which made some investors think the Fed will accelerate or upsize rate cuts, and the BoJ delivered a surprise rate hike. In two weeks the JPY went up 11% against USD.

So now the 1 USD you bought with your borrowed 160 JPY is only worth say 140 JPY, an 11% loss (don’t check my math, I’m doing this from bed). Oh and your NVDA or bitcoin or S&P 500 went down say 5%. So you just lost 16% in two weeks. But actually you, or rather your institution, borrowed 1.6 billion JPY with only say 0.4 billion JPY of its own capital. So the leverage that was so great when the trade was working, means you actually lost 80% of that capital.

At some point in the last week or two, your risk control guys tapped you on the shoulder and told you to liquidate your positions. If you actually were levered 4:1, that tap was at least a week ago because your risk control guys are not going to sit and watch you lose that much of the firm’s capital. Other traders got the tap a week ago, or on Friday.

When you get the tap, you sell regardless of price. But some significant part of a USD 4 trillion trade is being sold at the same time, by guys who also got the tap. And buyers (sophisticated ones) see what’s going on, they aren’t buying at today’s price. So the price plummets. For all kinds of things, because if you can’t sell one position you sell another one - basically whatever is liquid that you have gets sold, whether it’s part of the carry trade or not. You’re facing a margin call, if you don’t sell then it will be sold for you.

Anyway, a bunch of institutions and funds lost a bunch of money unwinding their trades - there are other trades that got broken, not just the yen carry trade - and pulled almost all asset prices down in the process. Don’t know if the unwinding is done, lot of guessing going on, but my guess is it is mostly done for yen carry, not so close to done for some of the other trades. But it will get done, in days most likely, maybe weeks.

Then other traders look at where prices are and what looks good now. And eventually the yen carry trade gets re-established. BoJ just did a mea culpa and all but promised not to do a surprise cut again, and the rate spreads are still wide.

[917_Langheck]

Originally Posted by jyl

Not market manipulation. A whole bunch of professional traders just got forced to liquidate a whole lot of positions in a hurry, because the yen carry trade blew up.

Japanese interest rates have been near zero, so a trader (not really a retail trader, think institution) could borrow 160 JPY for less than 1%/yr, sell it for 1 USD and use that dollar to buy a Treasury bill paying 5%/yr. If more aggressive, buy US stocks, bitcoin, Mexican short term bills, etc. That is called a carry trade. Lots of institutions made lots of money on this trade. Of course they are borrowing 1.6 billion JPY, not 160. Total size of the yen carry trade, in this and other forms, was about USD 4 trillion - per some estimates, others think more.

Unfortunately for them, Bank of Japan has been talking about raising rates which would strengthen the yen, the Japanese govt has been intervening in FX markets to strengthen the yen, and the US Federal Reserve is going to start cutting rates which will tend to weaken the US dollar. Then last week there was some weak economic data in the US which made some investors think the Fed will accelerate or upsize rate cuts, and the BoJ delivered a surprise rate hike. In two weeks the JPY went up 11% against USD.

So now the 1 USD you bought with your borrowed 160 JPY is only worth say 140 JPY, an 11% loss (don’t check my math, I’m doing this from bed). Oh and your NVDA or bitcoin or S&P 500 went down say 5%. So you just lost 16% in two weeks. But actually you, or rather your institution, borrowed 1.6 billion JPY with only say 0.4 billion JPY of its own capital. So the leverage that was so great when the trade was working, means you actually lost 80% of that capital.

At some point in the last week or two, your risk control guys tapped you on the shoulder and told you to liquidate your positions. If you actually were levered 4:1, that tap was at least a week ago because your risk control guys are not going to sit and watch you lose that much of the firm’s capital. Other traders got the tap a week ago, or on Friday.

When you get the tap, you sell regardless of price. But some significant part of a USD 4 trillion trade is being sold at the same time, by guys who also got the tap. And buyers (sophisticated ones) see what’s going on, they aren’t buying at today’s price. So the price plummets. For all kinds of things, because if you can’t sell one position you sell another one - basically whatever is liquid that you have gets sold, whether it’s part of the carry trade or not. You’re facing a margin call, if you don’t sell then it will be sold for you.

Anyway, a bunch of institutions and funds lost a bunch of money unwinding their trades - there are other trades that got broken, not just the yen carry trade - and pulled almost all asset prices down in the process. Don’t know if the unwinding is done, lot of guessing going on, but my guess is it is mostly done for yen carry, not so close to done for some of the other trades. But it will get done, in days most likely, maybe weeks.

Then other traders look at where prices are and what looks good now. And eventually the yen carry trade gets re-established. BoJ just did a mea culpa and all but promised not to do a surprise cut again, and the rate spreads are still wide.

This^^^
This is what I read. Like I said, casino....