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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

Isn’t  it time or overtime to subscribe to all my work via e-mail, an RSS feed, on Twitter or Facebook.

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.

  • Peter Scannell

    LD, the more and more we learn about the pervasive financial frauds that have festered and flourished in our once envied market place, the more I wonder about one body of fiduciaries that should be up in arms and taking to the streets.

    The mutual fund industry’s “independent” boards of directors are the fiduciaries of the largest pool of unsophisticated investors on earth – America’s mom, pop, and children – their savings is said to have passed the $13,000,000,000,000 mark in 2012!

    How is it that this collective body of fiduciaries, whose single most important function is to ensure that the hard earned retirement/college savings of the American worker/family/child is invested in a fair and open market has not spoken out through their many “independent” director associations?

    To think that fiduciaries with such sacrosanct mission have not yet rallied around the American investor promoting transparency, market rulemaking such as insisting on the return of the up-tick rule, banning naked shorts, ferreting out glorified front-running algorithms …and the list goes on is, is utterly flabbergasting!

    Why the silence?

    Where is the outrage and activism from this selected, privileged, and highly compensated group that voluntarily answered the call to be the fiduciary to the American investor?

    • LD

      Peter,

      Great question. I think what we are seeing is the fact that those running Fidelity, Putnam, Vanguard, American Funds, Blackrock, and so many more do not dare “take on the industry” for fear of payback and retribution in all its glory. How would that payback and retribution be delivered? Limited access to 1. product 2. liquidity 3. research/strategy 4. prime brokerage capabilities and so much more.

      Not that the payback and retribution would be formalized but merely occur via the “cold shoulder” treatment.

      Where are the industry groups specifically the Investment Company Institute to wage this war? The ICI’s mission is :

      The Institute engages in three core missions: encouraging adherence to high ethical standards by all industry participants; advancing the interests of funds, their shareholders, directors, and investment advisers; and promoting public understanding of mutual funds and other investment companies.

      ICI has worked to advance the interests of mutual funds, their shareholders, directors, and investment advisers throughout its history by pursuing and helping secure a variety of public policy objectives. Promoting the role of fund directors, participating in securities market initiatives, increasing tax-deferred savings opportunities and ensuring fair tax treatment for fund investors are just a few of the initiatives ICI has continually pursued on behalf of funds and their shareholders.

      Promoting public understanding of mutual funds has long been an ICI core mission, and its public outreach has evolved as the mutual fund concept has become mainstream over the years. Today, ICI serves as a spokesman for funds and their shareholders before policymakers, opinion leaders, and the global media.

      I would say that they are failing.

      • fred

        Speaking of Vanguard, here is an interesting tactic that they have been employing since Fed ZIRP went into effect.

        The impact, most recently, has been felt primariy by small business SEP contributors. Vanguard limits the maximum contribution into the Treasury Money Market account to $10,000 per day. However, if you make a plan contribution for a larger amount, they make the deposit into the Treasury Money Market Fund then follow it up with a phone call about a week later notifying you of the management imposed deposit limitation and your alternative investment options to comply with the policy.

        Long story short…what happens to the interest on your funds from the date of receipt and deposit into the Treasury Money Market to the day of the phone call notifying you of the maximum deposit limitation and your investment alternatives? I’ll give you a hint, it doesn’t go to the fund-holder.

        Given this weekend’s developments in Cypress, one can only wonder how much more of a windfall a widespread “flight to safetly” might provide to Vanguard and to other Mutual Fund Companies with a similar Treasury Fund deposit limitation policy.

  • Peter Scannell

    “Today, ICI serves as a spokesman for funds and their shareholders before policymakers, opinion leaders, and the global media.”

    Duplicitous at best!

    The Investment Company Institute is the lobbing group for the mutual fund industry period.

    The ICI does not represent the interest of shareholders specifically as they once had the world believe.

    What we did learn from past mutual fund scandals is that the ICI had no problem accepting the dues Mutual Fund Companies owe the ICI for their influence pedaling from some mutual companies shareholder’s 12b-1 fees though.

    You know LD, the $10,000,000 billion dollar tip that mutual fund shareholder’s give the industry(remember, greater than .25% an expense, less than .25% a “tip”).

    He who gets credit for the dues paid to the lobbyists gets his/her interest peddled.

    Only Mutual Fund Investment firms send the club dues to the ICI.

    How is it possible that the ICI could represent both the industry and the shareholder’s gatekeepers(“independent” fund boards)– what an extraordinary conflict of interest?

  • Peter Scannell

    The Mutual Fund Industry and the Investment Company Institute could make a significant impact on leveling the playing field in our markets; it certainly would benefit the vast majority of traditional mom and pop investors (their savings are the trough where many pigs feed)– but that would require a new way of thinking.

    What are the odds of that happening…

  • LD

    What are the odds of that happening…?

    Slim and none….and Slim just left the building.

  • http://www.libertasfin.com Don C.

    Well there’s always a first. I think I must disagree with parts of the article & commentary. 1st let me say that I’ve worked on the street & in finance since ’87. I worked as a retail broker ’till ’02. I traded options on the floor for a year and all types of futures ‘off the floor’. I don’t actively trade for clients any longer. My points are as follows; As far as ‘tweeting’ to manipulate markets, this is a joke, right? There are no bigger manipulators of markets than all of the investment banks who trade in the pits, and everywhere else, and all of the brokerage firms who trade for there own accounts ahead of customers (front running) This has ALWAYS been rampant and this is NOT debatable. But sure, let’s have the FBI chase down some morons ‘tweeting’ about a name they can short. As far as actively managed mutual funds? As a product they are a joke! The pay structure to the manager is completely at odds with performance, and the fees are ridiculous. David Swensen, Yale’s endowment manager wrote a scathing article on mutual funds in the WSJ a few years back. I manage my own money now but for clients? No way – they have no idea how lopsided the business is. It was never intended for “Mom & Pop” to participate in the first place. Larry, i enjoy your column daily, and let me tell you, I could write VOLUMES based on what I saw,experienced and did on Wall ST.

  • fred

    LD,

    These mini flash crashes aren’t limited to “phoney tweets”, watch what happens to a companies share price the day after an earnings miss by even a few pennies; the price might drop 15-20% triggering large numbers of stops separating retail investors from there money.

    Often, by the end of the day, share prices recover to unchanged or higher, just as they did in the “flash crash”. Many/most investors are left totally unaware of the massive daily price spread and underlying risk.






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