Is stock manipulation rife?
Posted on March 27, 2007 by Richard Beddard
Filed Under Investing |
There’s uproar in the States over an interview Jim Cramer gave to The Street.com in December. If you don’t follow US stocks, and you’re not a trader you might not know who Jim Cramer is. Otherwise, odds-on, you come across him pretty much every day. He’s a former hedge fund manager, a ‘talking head’ who’s pretty much everywhere on TV and the ‘net.
If you haven’t seen the video, it’s worth watching, because Cramer describes dubious and illegal tactics used by hedge funds to manipulate stock prices. Manipulation by institutional traders is frequently discussed on private investor bulletin boards, but rarely from a position of knowledge. Also, since Cramer admits to having employed some of the tactics, in a candid moment he may have ‘done a Ratner‘ and destroyed his own reputation.
Henry Blodget thinks Cramer’s “crazy confession” will destroy his career. He’s annotated quotes from the interview, which is very helpful for those of us less well versed in the dark arts. In some ways Blodget is ideally placed to comment. The former analyst was banned for life from the securities industry for publishing positive research notes on companies he privately trashed during the dot.com boom. Now he’s come back as a blogger, and writer of the deliciously titled ‘Bad Advice‘ column in Slate.
Although it’s fascinating, being a long-term investor I take the view that that traders knocking shares up and down averages itself out, and I find myself curiously agnostic on the rights and wrongs. How do you stop traders lying? How do you stop traders using their financial clout to scare other traders out of the market? Cramer describes a cocktail of the two: where traders repeatedly sell (or buy) shares in a company and leak misinformation to gullible media outlets to panic other traders into selling (or buying), thereby moving the market in the direction they want. I imagine greater minds than mine are working on how to stop this, but Cramer says the SEC doesn’t understand.
The evidence is academic as well as anecdotal. According to research on predatory short-selling surmised on the CXO Advisory Blog:
…it appears that some short selling is manipulative, seeking to scare other traders out of their holdings during sharp but temporary engineered price drops.
A post on the Big Picture blog hints at a kind of fin-de-siècle atmosphere pervading this bull market, and I’m inclined to agree. Celebrity pundits, trickery and fraud, it sounds like typical top-of the market froth. I think it’s more likely the end of this bull market will kill Cramer off, than his confession. That said, Blodget seems to be enjoying a second life…
Postscript: Surely manipulation happens over here too. In fact, according to one commenter UK newspapers are complicit in ramping up US stocks:
The hedge funds are more creative now. They use foreign newspapers (harder for the SEC to investigate, plus UK newspapers have much lower standards when it comes to fact verifications) like UK’s Sunday Express to inject a bogus rumor of Alcoa or Dow takeover for example.
It is interesting that nobody has complained and nobody has minded the manipulations when the manipulations were directed to move the prices up, but everyone gets upset when the manipulations become directed to bring the stock price down (as in Cramer’s example).
There are interesting double standards embedded in the psychology of the mob – manipulations are ok as long as they are directed to drive the stock prices up.
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3 Responses to “Is stock manipulation rife?”
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I think it’s rife on the smaller markets such as AIM, OFEX etc. Its bound to be with small firms desperate for stock purchases to bolster the share price.
There has been talk of “manipulation” of markets by members of share investing forums.
I own one in New Zealand www.shareinvestor.biz and we have been discussing the influence that boards like ours might have on those reading members comments.
Like brokers and analysts though, members of share investing forums all have influence. It is up to readers though how and if they act on info they get from 3rd parties.
The maxim must be when investing “Do you own research”
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