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Market Manipulation Live
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Market Manipulation Live

by The MoleJuly 7, 2010

A few days ago Karl ‘No Slave To Fashion’ Denninger published a late night video which featured the all so familiar practice of tape banging that has become so prevalent in the overnight index futures. Today he followed up with this:

Head on over to chaostheorien.de for an interesting article to which I contributed over the last couple of days, along with others, dealing with market manipulation.

Note that the article is in German; if you read German all is good, otherwise use Google’s “translate” service if you’d like to turn it into English – it does a decent job of it.

Turns out, both the Google and Babelfish translation engines produced something that sounded like English but may at best be described as Germinglish – simply horrific. Where is a bi-lingual Kraut when you need one? Well, present and accounted for. So, I just sat down and spent the last hour translating the damn thing. Although I took a liberty here and there I personally think I did the original piece due justice. So, here it is – in ‘real’ English and I hope it manages to convey a story that desperately needs to be told. Please pass it on and get the word out – after all, as avid traders (on the receiving side of such manipulations) it’s in our very own interest:

Market Manipulation Live (translated by Mole)

The computer dominated trade at the financial markets is becoming a massive problem, a growing practice from which only a small select group of the “financial elite” is able to benefit. All other market participants increasingly find themselves outgunned and on losing terrain. If nothing else this rapidly growing activity could easily serve as the theme of new type of reality show, maybe aptly titled ‘Market manipulation Live.’

Worldwide there are less than two dozen institutes run by the ‘financial elites’, such as JPMorgan Chase and Goldman Sachs, which participate in the type of high performance computer based black box trading with execution times that can me measured in nanoseconds. That in turn opens the door to unmitigated market manipulation, a practice that is quickly becoming the norm rather than the exception. Simple dealers and investors unable to afford veritable SciNet class equipment in this ‘financial war’ find themselves hopelessly outgunned.

Initially it was assumed that computer based black box trading driven by complex mathematical formulas would actually combat manipulative market activity. As Ellen Brown illustrates by means of patented computer program by Max Keiser:

“It would do this by matching buyers with sellers automatically, eliminating ‘front running’ – brokers buying or selling ahead of large orders coming in from their clients. The computer program was intended to remove the conflict of interest that exists when brokers who match buyers with sellers are also selling from their own accounts. But the program fell into the wrong hands and became the prototype for automated trading programs that actually facilitate front running.

Also called High Frequency Trading (HFT) or ‘black box trading,’ automated program trading uses high-speed computers governed by complex algorithms (instructions to the computer) to analyze data and transact orders in massive quantities at very high speeds. Like the poker player peeking in a mirror to see his opponent’s cards, HFT allows the program trader to peek at major incoming orders and jump in front of them to skim profits off the top. And these large institutional orders are our money — our pension funds, mutual funds, and 401Ks.”[1]

The blatant practice of this developing trend was clearly demonstrated a few days ago (more specifically on July 5th at exactly 12:15am CDT) by Karl Denninger, founder and author of ‘The Market Ticker’, a widely popular financial blog. This special market [featured in the video] is based on the S&P (Standard & Poors) 500 stock index, which is one of the stock indexes of the CME (Chicago Mercantile Exchange) in the United States. The S&P 500 index is calculated using the prices of 500 large capitalization US companies. The ES futures market is traded on the Globex electronic trading system, 24 hours per day from 5:00 PM Central Time on Sunday night to 4:30 PM Central Time on Friday night. The ES futures market has a daily trading volume of approximately 1,100,000 contracts, and a daily price range of approximately 13 points (52 ticks).”[2]

Under the title ‘Market Manipulation on Display’ Denninger then posted the following video, in which he clearly demonstrates several manipulation attempts occurring live in the ES future market.

For more in depth explanation of what can be seen above I yesterday contacted Mr. Denninger via email directly.

chaostheorien.de: “Mr. Denninger, what happens here exactly? Who participates here?”

Karl Denninger: “It is ‘someone’ (or a group of someones) with sufficient margin to place that size of an order. The margin on 2,000 contracts is over $1m, so we’re not talking about bit players here. These are hedge funds and/or prop trading systems belonging to large banks.”

chaostheorien.de: “What does this activity say about the so-called ‘free markets’?”

Karl Denninger: “They’re rigged – at least short-term. This intent of these shenanigans is to drive price the other way – that is, if the huge contract bid side shows up, the real intent of the participant is to sell, and his sell offer is up above. He’s looking to drive price a few ticks into his resing order, taking those funds from smaller and slower players who can’t possibly compete with this.

The practice is illegal, but it is EXTREMELY common. It happens in the pit too; this isn’t exactly rare. What’s rare is for it to be so blatant as to be easy to see and explain to people, as it was the other night.”

chaostheorien.de: “How do you handle those things as a trader?”

Karl Denninger: “You stay out when it’s happening. You can’t possibly play honestly in the markets when this is going on as a short-term speculator. IT doesn’t impact buy-and-hold people to the same degree (unless it causes a collapse or spike, which it can!) but it certainly impacts anyone attempting to speculate on a short-term basis. When you’re up against this sort of tactic you will simply get skinned.”

In order to get a few reactions to this live coverage of blatant market manipulation I yesterday followed up with a few more emails to for example James Turk and Bill Murphy. The Canadian fund manager Marshall Auerback, who among others works for PIMCO, responded as follows:

chaostheorien.de: “How do those things influence your ‘tactics’ in the market? Such rigging has to be taken into account as part of your analysis, correct?”

Marshall Auerback: “Yes, taken into account, but eventually you figure they are going to fail. You can only buck a primary trend for so long. If you couldn’t, then gold would still be $350 and the central banks would be happy as clams.”

To that James Turk, the founder of ‘GoldMoney’, the biggest digital gold currency worldwide, explained:

“I agree with Marshall. Gov’ts can fight the primary trend but they are losing the war. They will always lose in the long-run because markets (i.e., individuals) determine the primary trend, and markets are a bigger force than any gov’t or group of gov’ts acting in concert.”

To this Bill Murphy, chairman of the Gold Anti-Trust Action Committe, GATA, and operator of the website ‘Le Metropole Café“ (www.LeMetropoleCafe.com), added:

“Well, as you know, all I do is write about the market manipulations. Today is a perfect example. THEY want gold down as the US economy disintegrates, leaving massive money printing as the only way out. Thus, it is shoot the messenger time again. Sickening. And yes, they will lose, but it is more than aggravating.”

I showed these statements to Folker Hellmeyer, the chief analyst of the Bremen Landesbank and regular commentator of international financial affairs at “Goldseiten.de “(see: http://www.goldseiten.de/content/kolumnen/autoren.php?uid=152), and asked for his opinion. It reads as follows:

“The pleas of my colleagues are absolutely correct. I can only agree with their statements.”

The financial markets apparently do not provide the same level of access to all participants, and there exists exclusive preferred access for a small group of elites, a little known practice which makes market manipulation possible in the first place. Fact is that for example ‘front running” via black box systems is strictly prohibited, at least according to code of conduct posted by ACI. It does not matter that these events happen in nanoseconds. The sheer fact that different levels of access were made possible, casts a dark shadow at the regulatory policy framework set in place by the supervisory authorities. It is a scandal that in the context of allegedly free markets such preferred access would be permitted in the first place.

There is an immediate need for action to close down this type of preferred access to a small group of financial elites, as it only leads to manipulation at the detriment of the financial markets as a whole.

Until we get to a point where this type of corruption has been stopped CNBC and Bloomberg should consider live reporting of of these regularly scheduled market manipulation attempts. Mr. Denninger would certainly be available and gladly serve as a competent commentator of such overnight ‘game play’. If nothing else the live reports of our financial mainstream media may become somewhat more exciting again.

Sources:

[1]  Ellen Brown: „COMPUTERIZED FRONT RUNNING: ANOTHER GOLDMANDOMINATED FRAUD”, published on April 21st, 2010 at: http://www.webofdebt.com/articles/computerized_front_running.php

[2] Adam Milton: “Profile of the ES Futures Market”, published on About.com at: http://daytrading.about.com/od/marketprofiles/a/ProfileES.htm


About The Author
The Mole
Mole created Evil Speculator amidst the chaos of the financial crisis in early August of 2008. His vision for Evil Speculator is a refuge of reason, hands-on trading knowledge, and inspiration for traders of all ages and stripes. You can follow him and his nefarious schemes at various social media waterholes below.
  • DarthTrader

    I hate that that goes on . . . and a broad variety of Other techniques as well. AS it stands I look to reap the benefits of their folly

    Like a few years back when Goldman bought 1000's of way out of the money August calls on Gold in April (Early 2000's) Gold community got a little excited . . . then in July when the Price of Gold (POG) reached that price Level . . . . Goldman shorted 5000 contracts of Gold killing the Gold Rally Dead with no risk at all due to their call positions.

  • DarthTrader

    Tomorrow is the anniversary of the 2009 failed head and shoulders on the spx . . . july 8th at 880

    If spx gets above 1120 I'd say history is repeating.

    Then I would say we would rally til 10/08/10 then Crash in a spectacular fashion

    But I still lean heavily to the short side for now

  • Nightwind

    Mole, excellent evil insight into market internals(steeple's column). Its like trying to read the mind of pure insanity with an EEG. Add the Denniger column and now you have criminal market insanity.

  • BigHouse(Aka Mr Vix)

    You should send this to Zero Hedge Mole. Then it will really go viral. Good stuff. Thanks

  • http://evilspeculator.com molecool

    GS, JPM, and FNM are the reason I don't play gold anymore. Unless it's so overbought that I see a thumping coming three miles away.

  • Fearless

    I'm not afraid of a pump attempt. I fully expected it last week when NYMO positive divergence started showing up. I grabbed hedging calls right away on July 1 near the close at market price. (My VIX 26 JULY PUT was about $.50 per back then, it's at $1.10 today and may very well be ITM by Monday.)

    I am quite encouraged to see ISEE closing at 247 today and we're only just above 23.6% retrace of the entire drop. I, like Mole, have no interest analyzing every wiggle and squiggle; therefore, I look at the longer term picture and my theory is that sentiment extremes shall become more extreme at the counter-trend retracements, whether bull or bear markets. If I see ISEE at 300+ before we even hit the 200 day SMA, then I'll be a lot more comfortable going full short if supported by negative divergence alignments on the Zero Lite, hourly chart, 15 minute chart, and the NYMO.

    In hindsight, there was no secrets to why the market bounced where they did. They were about to flip into a new cycle (from bull to bear), but they can't show their cards right away. I expect the 200 day SMA to slam down on the market if the market is manipulated. It was manipulated on the way up, and I am pretty sure it was (and will be) also manipulated on the way down.

  • mothwhoflysbackwards

    Condem it or condone it, not as powerless as we may think. Oh man! When people get mad about banks getting full value cheap loans (because of a government guarantee) on their crap paper and then turning around and loaning it back at a higher rate … well maybe then it will be time to worry about front running. But if people don't care about a plank shoved up the ass why should they worry about a splinter in the toe?

    Don't get me wrong – I agree that it sucks – but I find your faith in the american people to recognize and rectify the situation to be both touching and naive.

    BTW I've got a nice windmill.

  • mrBozo

    Perhaps a little overindulgence in the fireworks and hotdogs and suddenly it's back to Apple Pie and the Constitution.

    Read the disclaimer folks.

    http://www.youtube.com/watch?v=ELn0XZRvgok

    Let me read you a little bed time story from the good Dr. Seuss

    I

    do not like this Uncle Sam,

    I

    do not like his health care scam.

    I

    do not like these dirty crooks,

    or

    how they lie and cook the books.

    I

    do not like when Congress steals,

    I

    do not like their secret deals.

    I

    do not like this speaker, Nan

    ,

    I

    do not like this 'YES WE CAN.'

    I

    do not like this spending spree,

    I'm

    smart, I know that nothing's free.

    I do

    not like your smug replies,

    when

    I complain about your lies.

    I

    do not like this kind of hope.

    I

    do not like it, nope, nope, nope!

  • BobbyLow

    You already posted this once the other day.

    It is challenging enough trying to deal with the market.

    Weeding through political Bull Shit isn't going to help anybody make a dime.

    Please, this is trading blog not a political board.

  • doublethink

    The government's ability to manipulate equity markets will prove convenient when the Treasury finally faces a possible failed auction. The bond market is much too big for the Three Stooges to ream but they can create a panic. As they say, just follow the money…and keep your eyes on bonds.

  • mrBozo

    If there is one thing the government LOVES above all else, it is a Panic.

    Panics provide the opportunity to write laws, create programs, increase taxes,spend money, expand the bureaucracy, impose regulations, extend control – in short, to justify more government.

    BTW At 1075 I'll be as short as a midget in a limbo contest

  • mrBozo

    All education has a political motive

    Even if you're on the right track, you'll get run over if you just sit there.

    Be Water
    http://www.youtube.com/watch?v=OW-cnizLDEE

  • mothwhoflysbackwards

    If you mean the gov. will try to take down stocks to cause a flight into t-bills to prop up auctions yep I've heard that before. But aren't you assuming that the people who can take down the markets and the gov. have the same interests? I don't think the prvt. entities that can take down the market really give a rats ass what happens to tbills except as it effects their book. And what do you mean by the government… the GS boys (in gov. appointed by both partys) … or the elected pols. If the later why would the market ever decline going into an election?

    Anyway, on that theory, we seem a long ways from the “government” (unelected prvt interests or pols) having to take down equities to create a flight to safety, I mean people are buying our debt like its going outa style.

    Whats really going on is we are on the cusp of a massive defaltion, any manipulation (except by manipulators that are out for a direct profit) is being done to keep asset prices up.

  • http://implicittrading.com BalaB

    Mr. Mole,

    Good stuff. However, I'd like to suggest it is possible to trade other vehicles either not on the HFT or Algo's radar or in tandem with their activities. While I agree, its a bunch of crap, you can still make money. Anyhow, fwiw…….

  • DudePlunger

    Thanks for translating this mole. I've witnesses this activity overnight as well, it's nice that Denninger recorded it.

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