TOM WILLIAMS
Manipulation of the
Markets
A large percentage of people are surprised to learn that the markets
can be manipulated in the ways that we
have described. Almost all traders are labouring under various
misconceptions.
There are all sorts of professional interests in the world's financial
markets: brokers, dealers, banks, trading
syndicates, market-makers, and traders with personal interests. Some
traders have a strong capital base,
some are trading on behalf of others as investment fund managers,
pension fund managers, insurance
companies and trade union funds, to name but a few.
As in all professions, these professionals operate with varying
degrees of competence. We do not have to
be concerned by all these activities, or what the news happens to be,
because all the trading movements
from around the world are funnelled down to a limited number of major
players known as market-makers,
pit traders or specialist (collectively know as the `smart money' or
`professional money'). These traders, by
law, have to create a market. They are able to see all the sell orders
as they arrive, and they can also see all
the buy orders as they come in. They may also be filling large blocks
of buy or sell orders (with special
trading techniques to prevent putting the price up against themselves
or their clients). These traders have
the significant advantage of being able to see all the stop-loss
orders on their screens. They are also aware
of `inside information', which they use to trade their own accounts!
Despite `insider dealing' being illegal,
privileged information is used all the time in direct and indirect
means to make huge sums of money.
To put it simply, a professional trader can see the balance of supply
and demand far better than anyone else
can. This information is dominating their trading activity. Their
trading will then create an ongoing price
auction.
Floor traders usually complain bitterly if they are asked to
modernise, which usually means leaving the
floor to trade on computer screens. They will have lost the feel and
help of the floor! "I am all in favour of
progress, as long as I do not have to change the way I do things", was
a passing comment from one London
floor trader as he was forced off the trading floor.
Professionals trade in many different ways, ranging from scalping
(that is buying the bid and selling the
offer) to the long-term accumulation and distribution of stock. You
need not be concerned too much with
the activity of individuals, or groups of professional traders,
because the result of all their trading is shown
in the volume and the price spread. Firstly, the volume is telling you
how much trading activity there has
been. Secondly, the spread or price action is telling you the position
the specialists are happy with on this
activity (which is why the price spread is so important). All the
buying and selling activity from around the
world has been averaged down into a 'view' taken by the specialists or
market-makers a view from those
traders who have to create a market, can see both sides of the order
book, and who trade their own
accounts.
However, you do need to recognise that professional traders can do a
number of things to better their
trading positions: Gapping up or gapping down, shake-outs, testing,
and up-thrusts are all moneymaking
manoeuvres helping the market-makers to trade successfully, at your
expense it matters not to them, as
they do not even know you.
Master the Markets 46
This brings us to the "smoke-filled room syndrome". Some people may
think that when we talk about a
moneymaking manoeuvre, some sort of cartel gathers in a smoke-filled room.
"OK chaps, we are going to have a test of supply today. Let's drive
the prices down on a few strategic
stocks and see if any bears come out of the closet".
In practice, it does not usually work like that. This sort of thing
was much more common many decades
ago, before the exchanges were built, and the volume of trading was
such, that markets were much easier to
manipulate. Now, no single trader, or group of traders, has sufficient
financial power to control a market
for any significant length of time. True, a large trader buying 200
contracts in a futures market would
cause prices to rise for a short time, but unless other buyers joined
in, creating a following, the move could
not be sustained. If you are trading futures related to the stock
market, any move has to have the backing of
the underlying stocks; otherwise, your contracts are quickly
arbitraged, bringing the price back in line with
the cash market.
If we take the example of the 'test of supply', what actually happens
is something like this:
Groups of syndicate dealers have been accumulating stock, anticipating
higher prices in the future. They
may have launched their accumulation campaigns independently. Other
traders and specialists note the
accumulation and also start buying. Before any substantial up-move can
take place they have to be sure
that the potential supply (resistance) is out of the market. To do
this they can use the `test`. Usually they
need a window of opportunity in which to act. They do not collude in
the test action directly; they simply
have the same aims and objectives and are presented with the same
opportunity at the same time.
Market-makers can see windows of opportunity better than most other
traders. Good or bad news is an
opportunity, so is a lull in trading activity. Late in the trading
day, just before a holiday, is often used and
so on. As they take these opportunities, reduced effort is required to
mark the prices down (this is now cost
effective), the market automatically tells them a story. If most of
the floating supply has been removed,
then the volume will be low (little or no selling). If the floating
supply has not been removed, then the
volume will be high (somebody is trading actively on the mark-down
which means supply is present). If
most of the floating supply had been removed from the market, how can
you have active trading or high
volume? (This point refers specifically to cash markets).
Professional interests frequently band together. Lloyds of London, for
example, have trading syndicates, or
trading rings, to trade insurance contracts, making their group effort
more powerful while spreading the
risk. You accept this without question you know about them because
they are well known and have
much publicity; you read about them, they are on television, they want
the publicity and they want the
business.
Similar things go on in the stock market. However, you hear little of
these activities, because these traders
shun publicity. The last thing they want is for you or anybody else to
know that a stock is under
accumulation or distribution. They have to keep their activities as
secret as possible. They have been
known to go to the extremes, producing false rumours (which is far
more common than you would perhaps
believe), as well as actively selling the stock in the open, but
secretly buying it all back, and more, via other
routes.
>From a practical point of view, professional money consists of a mass
of trades, which if large enough, will
change the trend of the market. However, this takes time. Their lack
of participation is always as
important as their active participation. When these traders are not
interested in any up-move, you will see
low volume, which is known as `no demand`. This is a sure sign that
the rally will not last long. It is the
activity of the professional traders that causes noticeable changes in
volume not the trading activity of
individuals such as you or me.
Top professional traders understand how to read the interrelationship
between volume and price action.
They also understand human psychology. They know most traders are
controlled in varying degrees by the
TWO FEARS: The fear of missing out and the fear of losses.
Master the Markets 47
Frequently, they will use good or bad news to better their trading
position and to capitalise on known
human weaknesses. If the news is bad and if, at that moment, it is to
their advantage, the market can be
marked down rapidly by the specialist, or market-makers. Weak holders
are liable to be shaken out at
lower prices (this is very effective if the news appears to be really
bad). Stop-loss orders can be triggered,
allowing stock to be bought at lower prices. Many traders, who short
the market on the bad news, can be
locked-in by a rapid recovery. They then have to cover their position,
forcing them to buy, helping the
professional money, which has been long all the time. In other words,
many traders are liable to fall for
'the sting'.
Market-makers in England are allowed to withhold information on large
deals for ninety minutes. Even
this lengthy period is likely to be extended. Each stock has an
average deal size traded and, on any deal,
which is three times the average, they can withhold information for
ninety minutes. If for example, trading
in ICI, the average is 100,000 shares and 300,000 are traded, they can
withhold this information for ninety
minutes. Their popular explanation for this incredible advantage is
that they have to have an edge over all
other traders to make a profit large enough to warrant their huge
exposure. As these late trades are
reported, this not only corrupts the data on one bar, but two bars. To
add insult to injury, you are expected
to pay exchange fees for deliberate incorrect data. In practice, the
TradeGuider software ignores all late
trades.
So professional traders can withhold the price at which they are
trading at for ninety minutes or longer, if it
suits them. However, the main thing they want to hide from you is not
the price, but the VOLUME.
Seeing the price will give you either fear or hope, but knowing the
volume will give you the facts. In
trading other markets around the world, you may not have the same
rules, but if the volume is so important
in London, it will be just as important in any other market. Markets
may differ in some details but all free
markets around the world work the same way.
As these market-makers trade their own accounts, what is stopping them
trading the futures markets or
option markets just before they buy or sell huge blocks of stocks in
the cash markets? Is this why the future
always appears to move first? Similar things happen in other markets
however, the more liquid or
heavily traded a market is, the more difficult it will be to manipulate.
You will frequently see market manipulation and you must expect it. Be
on your guard looking for
manipulation and be ready to act. The TradeGuider system will be an
invaluable tool in helping you to
achieve this. Market-makers cannot just mark the price up or down at
will, as this is only possible in a
thinly traded market most of the time, this will be too costly a
manoeuvre. As we have already pointed
out, windows of opportunity are needed; a temporary thinning out of
trading orders on their books, or
taking full advantage of news items (good or bad).
It is no coincidence that market probes are often seen early in the
mornings or very late in the day's trading.
There are fewer traders around at these times. Fund managers and
traders working for large institutions
(we shall refer to these people as `non-professional' to distinguish
them from market-makers et al) like to
work so called 'normal hours' they like to settle down, have a cup
of coffee, or hold meetings before
concentrating on market action. Many traders who are trading other
people's money, or who are on
salaries, do not have the dedication to be alert very early in the
morning. Similarly, by late afternoon, many
are tired of trading and want to get home to their families.
In the next chapter, we will look at another tool that you will find
useful in your examination of market
behaviour: trend lines and trend channels. You will find, however,
that even here you cannot completely
ignore volume indications.
