Market Manipulation Live
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.”
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).”
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.
 Ellen Brown: „COMPUTERIZED FRONT RUNNING: ANOTHER GOLDMANDOMINATED FRAUD”, published on April 21st, 2010 at: http://www.webofdebt.com/articles/computerized_front_running.php
 Adam Milton: “Profile of the ES Futures Market”, published on About.com at: http://daytrading.about.com/od/marketprofiles/a/ProfileES.htm