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“Markets Don’t Go Up, They’re Put Up”

Posted by Larry Doyle on August 20, 2010 6:57 AM |

I have to admit, while I personally view myself as an optimist by nature, I come from an immediate and extended family which could redefine what it means to be cynical. Often, I will initially chuckle when hearing my siblings (6 brothers, 1 sister) and uncles characterize an individual or situation in less than glowing terms. The busting on each other typically continues until somebody goes over the line. That happens fairly regularly.

Lucky Shamrock

Invariably, a number of my brothers, uncles, and I will not be able to restrain ourselves from laughing, while the individual targeted for the good-natured ridicule exits the conversation often cursing under his breath. Such is life in a close-knit, Boston Irish Catholic family.

That strong, competitive, acerbic cynicism does not end at Mom’s kitchen door but carries over into the workplace. My immediate and extended family largely pursued careers in the legal and investment fields. Both career paths have allowed our cynical wit to flourish. Why do I raise this topic?

I am reminded of a conversation with my uncle a few months back while reading The Wall Street Journal’s Wild Trading in Metals Puts Fund Manager in Cross Hairs. Let’s review today’s news highlighting allegations of market manipulation by a former high profile trader at one of the world’s largest hedge funds. Then we can position this story against the direct, humorous, witty, and cynical view of a Boston Irish stockbroker with 50-plus years of experience. Let’s navigate as the WSJ writes:

In late April, the CFTC filed a civil complaint against Moore (Capital) claiming that an unnamed former portfolio manager attempted to manipulate prices in the futures markets. People familiar with the case say the former manager is Mr. (Christopher) Pia. Moore paid a $25 million fine to settle the matter, without admitting or denying wrongdoing, but the investigation of Mr. Pia is continuing. A spokesman for Mr. Pia declined to comment.

The hedge-fund industry has been rocked over the past year by allegations that fund managers reaped illegal profits by trading stocks based on inside information. The investigation of Mr. Pia and the case against Moore suggest that commodities trading also can be an insiders game—a market where big investors may be able to throw their weight around to move prices to their advantage.

Prices in the futures markets for commodities help determine how much consumers pay for everything from a carton of orange juice to a gallon of gas. Cases involving investors trying to artificially move commodities prices are nothing new. But abusive trading practices have become more prevalent, says Bart Chilton, a CFTC commissioner, because regulators, until recently, have lacked the tools needed to aggressively go after and punish wrongdoers. (LD’s emphasis!!)

Over the long term, supply and demand dictates prices in the commodities markets. What concerns regulators, for the most part, are efforts to move prices over the short term. The growing number of large investors speculating in commodities has created “aberrations” that can present the “opportunity for foul play,” says Mr. Chilton.

The recently enacted financial-reform bill, Mr. Chilton says, will give the CFTC more enforcement tools to pursue more cases involving disruptive trading practices in the commodities markets, and to levy stiffer penalties.

One way investors bet on commodities is through the futures market, where they enter into contracts to buy or sell raw materials at a set price on a specified date. In its complaint against Moore, the CFTC said the unnamed portfolio manager engaged in a practice known on Wall Street as “banging the close.” That involves trying to move the price of futures contracts by inundating the market with orders just before trading ends.

Although this specific situation with Christopher Pia and Moore Capital is focused on commodities trading, the simple fact is variations of ‘banging the close’ or assorted other techniques can be used to illegally move many markets. Although I never put much credence in those who promoted conspiracy theories and tales of market manipulation, I now do not discount those who hold these feelings —  including my uncle, a world class cynic and longstanding broker. What did he share with me a few months back? He offered, “Larry, it’s a racket. Markets don’t go up, they’re put up.” I chuckled and he responded, “You think I’m kiddin’ ya?”

To know him is to love him.

In light of our current market structures, especially in the equity markets, maybe my uncle is actually less cynic and more wise sage.

For those interested in techniques and strategies used to manipulate markets, check out the following: churning, pump and dump, daisy chains, ghosting, wash-salesbear raids, cornering the market, false market, bucketing, circular trading, front running, tailgating, jitney. Regrettably, these practices and variations thereof have gone on for time immemorial.

Larry Doyle

I have no affiliation or business interest with any entity referenced in this commentary. As President of Greenwich Investment Management, an SEC regulated privately held registered investment adviser, I am merely a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

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