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
