Market Manipulation

Ulli Uncategorized 1 Comment

Reader Richard had some interesting thoughts on what he considers market manipulation and asks whether it might affect trend tracking in general:

I really value your work and daily comments; so what I am about to say is not meant as a negative reflection on you or your tracking signals.

My concern is the ability to “trust” them, when it seems that the markets they are monitoring/reflecting seem to be blatantly manipulated to look better than the underlying realities truly are.

Action at the (last) Friday’s close is a perfect example. There were huge (orders of magnitude) increases in e-mini futures orders right at the close that appear designed to “paint the tape’ and have the markets close up for the day.

We have the US government acting more and more socialistically vis-à-vis the auto industry, and more and more violating contract law relative to bondholders etc.

I’m not sure I’m expressing my concerns correctly, but I (and many of your readers I’m sure) would be helped by any comments you’d care to make about investing in today’s treacherous environment, and relying on trend-signals when what they are tracking underneath them has changed so dramatically from when you first designed your trend-following system.

Again, I so value your work and your comments that if I didn’t I wouldn’t even bother to write what I have here.

First, I have to say that you can’t be sure of any manipulation via “painting the tape.” Just because large orders come in at the close does not mean anything at all. Case in point is what happened this week.

If you had watched certain ETFs (long and inverse ones) you might have also noticed millions of dollars of orders coming in right at the closing price. To you, the casual observer, you might have interpreted this as something different than it actually was. It had nothing to do with market manipulation; it simply was me setting up hedged position at MOO (market on close) to be sure that my intended ratios of long to short were what I wanted them to be.

There are a lot of trading strategies that utilize market-on-opening and market-on-close orders to fulfill an investment objective. To draw any other conclusion without any additional facts is simply guesswork.

Second, if someone really would want to manipulate markets, keep in mind that he is stuck with a position which he eventually has to unwind again. Yes, I am sure there have been manipulation attempts especially in thinly traded futures markets, which is why I always stress the need of investing only in high-volume products.

Third, what matters in the end is the closing price no matter how you arrive at it. Stringing together closing prices will form a trend that can be measured and is the only thing when it comes to investing that is real to me. I have more trust in those than company reports with their misleading footnotes and questionable interpretations.

When all is said and done and analyzed to the hilt, we end up with a final price for the day. If it turns out that this price was incorrect because of misleading facts, then it will correct itself the next day or the next week. I see no reason that this has changed over the past 25 years to make me reevaluate the basis of trend tracking.

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Comments 1

  1. It gets so old most of your readers taking shot at the "boogy man liberal" gov rousing about "socialistic" saving the auto industry or whatever. I read almost nothing when the same gov under both the R & D regiemes handed literally trillions directly and thru .025% interest rate to their banking brothers. Where were the horror. 25 or 50 billion doestn even make a ripple in the mkt over the 6-12 months that GM/Chrysler will spend it.

    Furthermore, what about all the huge gov contracts that go to some "insider" corp for a sweetheart deal. How about all the no-bid Iraq contracts the last 5 years. Where is the screaming that the gov is meddling in the mkt. Lastly, every frigin law/reg passed gore's some industry/ companies ox and is a sweetheart deal for some lobbyst benefactor. The freebee interstate destroyed the regional railroads as uncompetitive they had to keep up their own rails and the gov does the upkeep on the interstate.
    The mkt is the mkt. Its only bad when it is not tilted to corp benefactors. Look, the same oil speculation that went on a year ago is happening again. The world is awash in crude. There are over 30 tankers docked in the Pacific as there is no place to put/refine the oil, yet the excess cash is sloshing around. What has changed is 5% of the population now own 95% of the wealth and that money looks to hedge funds to earn excess profits rather then middle class americans investing with firms/people like Ulli.

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