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Here Come da Feds: New Trick to Manipulate Market

Posted by Larry Doyle on March 6, 2013 7:20 AM |

I recently received a message from friends in the market apprising me of the newest “trick” being used by those who like to move/manipulate markets. What are the wizards up to?

Let’s get the inside scoop on what is really going on within our equity markets from our Sense on Cents Hall of Famers Joe Saluzzi and Sal Arnuk at Themis Trading. They recently sent out the following:

From Themis Trading: A new phenomenon is sweeping the equity market. It’s called the Fake Tweet Mini Flash Crash. Recently, two separate twitter accounts posing as research firms have posted negative news tweets. In both situations the stocks of the targeted companies (SRPT and ADNC) immediately experienced a mini flash crash and plummeted . Within seconds, after realizing the tweet was fake, the stocks recovered all of their losses.

With the SEC playing about twenty years worth of catch up and FINRA — well who knows what they are doing — we awaken this morning to see that the FBI is stepping into the fray. The need for the Feds is the ultimate indictment of how badly out manned, out gunned, and out prepared our financial cops are from a 20 year Rip Van Winkle-type snooze.

The FT highlights the presence of these new “cops” entering the scene in writing, FBI Joins War Against Abuse of Fast Trading,

The FBI has joined securities regulators to tackle the potential threat of market manipulation posed by sophisticated computer trading strategies that have taken markets beyond the scope of traditional policing.

The move reflects market participants’ evolution from traditional investment firms into financial engineering shops. Authorities are concerned that technological advances have outpaced hedge fund compliance programmes and left the stock market vulnerable to manipulation.

Authorities are exploring potential holes in the system, including new algorithms referred to as “news aggregation” that search the internet, news sites and social media for selected keywords, and fire off orders in milliseconds. The trades are so quick, often before the information is widely disseminated, that authorities are debating whether they violate insider trading rules, the people familiar with the matter said.

Authorities are also monitoring alpha capture systems, platforms where sell-side firms share information with buy side professionals, for potential front running or insider trading.

Is there any surprise that manipulators are finding new “tricks” to move markets?

What do we think has gone on with the manipulation of Libor, abusive sales practices in structured products, the misappropriation of customer funds from commodities brokers, abusive practices within mortgage servicers, money laundering within THE largest banks, front running in the equity markets? Shall I go on?

These are all outgrowths of a generation  — if  not longer — of financial regulatory capture combined with politicians having been compromised and bought off by the industry.

We reap what we sow.

Thankfully there are people like Joe Saluzzi and Sal Arnuk who have the character and courage to tell us what is really going on.

Navigate accordingly.

Larry Doyle

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I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

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