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Pump and Dump

Posted by Larry Doyle on May 6, 2010 2:28 PM |

Has the price action over the last year been largely nothing more than one of Wall Street’s greatest scams? Which scam is that? The classic scam in the securities industry known as pump and dump. While this scam is typically relegated to penny stocks or thinly traded stocks, the fact is the basic principles have been utilized within our current market structures as well.

The coordinated actions amongst global governments, regulators, and accounting boards have allowed the system to disguise the fact that our global economies remain mired in excessive debt. Obviously, certain countries and companies are much less impacted by debt than others but largely speaking the global debt vs GDP ratio remains exceptionally high. This fact is not changing anytime soon.

I view the massive runup in asset prices over the last year as a combination of:

1. A rebound from the “doomsday Armageddon” scenario of early 2009
2. Support by easy government money
3. An abrogation of accounting standards
4. A preponderance of high frequency trading.

In the midst of these scam-atic measures, the economy both here at home and overseas (primarily within the EU), remains severely challenged. Go ahead and compare our economy to any selected point in time and disspell my premise. I am stating that people should look at the overall trendline and eliminate the noise from selected individual data points. The trendlines show our economy struggling along at best. In the face of these struggles, the government may be buying time and relief for investors but the debt burdens remain.

Will the immediate reality of servicing the debt in Greece spread to other nations and ultimately our own shores? Unless real fundamental changes occur in how Washington does business, the answer is yes. Can Washington make those changes? I am not optimistic.

Washington has proven it is a large part of the problem. Can it be part of the solution?

Is pump and dump the best we could do?

That is all I have seen so far.

LD

  • Lou

    Can you say “casino?”

  • Matt

    Larry –

    What do you think happened today? Did today remind you at all of Black Monday 1987? Do you think today was caused by one inaccurate trade by a Citigroup trader? Or was it caused by all of these High Frequency Trading Computers that you have discussed before? Or was it from a fear of a cascade of European bank failures? As you have been saying for a while now Larry, get ready for a roller coaster ride! Today was sure an example of that!

    Matt

    • LD

      Matt,

      The crash in 1987 was a culmination from a buildup of issues and you could feel the market breaking. The selloff was 22%!! Today felt like a rug pull rather than a massive cascading selloff. Volumes have been so light on the upside so I am not surprised by the selloff.

      While ’87 felt like the world was truly changed the markets over the last year have struck me as largely a charade so if it is not real on the way up we should not be surprised by the sharp descent.

      If we review the markets, we topped out at 14, 200 got to 6600 or thereabouts, then back to 11, 200. Hindsight is always 20-20 but that 11, 200 level represents an approximate .61-.62% retracement of the down move and today’s close is approximately 50% of the entire move.

      I think the top for now has been put in. We may bounce around here for awhile and the Street and Washington will try to talk it up but the underlying economy remains severely challenged.

      Tomorrow’s jobs report will be heavily spun but census workers are ultimately temp workers whether they are reported as such or not.

      Back to your question. To a young trader 1987 was exceptionally nerve wracking. Today felt like a selloff that is LONG overdue. I do not think the market deserves to be anywhere close to these levels. The fact that it sold off in the manner that it did shows that the HFT programs are a structural issue.

      • TeakWoodKikte

        LD, How is it that a person can press the letter “b” can be entered instead of “m” and the human error is not “caught”?

        I find the reports of such a thing extremely suspect. Who might stand to gain from what is a such a bizarre thing if true? (sorry for tin hat, but that is what the MSM is reporting)

        • LD

          TWK,

          The fat finger is a crock. The fact is the very nature of the equity markets makes moves like this more prevalent. What is that nature? Electronic trading dominates and when a large number of sell orders come in, the high frequency traders who SUPPOSEDLY provide MORE liquidity just totally back away.

          The fact is I believe the high frequency traders took these sell orders to the hoop in a BIG way just yesterday.

          Did Shutdowns Make Plunge Worse?

          A number of high-frequency firms stopped trading Thursday in the midst of the market plunge, possibly adding to the market’s selloff.

          The withdrawal of high-frequency firms from the market didn’t necessarily cause the downturn, but could have added to it, some market experts say.

          A number of high-frequency firms closing down in the midst of a sharp market drop can “widen markets out substantially,” said Jamie Selway, managing director of New York broker White Cap Trading.

          • TeakWoodKikte

            Geez ….LD. A guy, Altman from Blackstone used the term “fat fingered” on Charlie Rose last night.

            Why would the HFT folks pick up their marbles and go home unless the positions they had were short to begin with?

            The “fat finger affair”…that is such a metphor on so many levels.
            TGIF!

  • Mike

    Today was a reminder that this market is not much more than a game of musical chairs.

  • Brandi

    It undermines my confidence in the system especially on days like today with Mary Shapiro heading the SEC.






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