Manipulation is Nothing New

Yesterday, former SEC attorney Teresa Goody joined those calling for an investigation into the market action on December 24.

It was hardly the biggest move we’ve seen over the past year. But, it resulted in new lows that ruffled a few feathers.

Click the image to watch the interview, or just keep reading.

Goody: …when you have these wide swings in the market, 400, 500, 600 points, 2 to 3 percent, I think that’s a clear indication that there is some sort of a market structure issue, so the SEC will have to investigate, I think, and also FSOC look into why there’s this volatility because it’s not fair to everyday investors, it’s not fair to all investors, really. And it really goes to the fair and efficient markets that we have.

Melissa Lee and Kelly Evans of CNBC could have left it there. But, to my surprise and to their great credit, they challenged Goody’s statement — eliciting a nonsensical stream-of-consciousness response that rivaled one of the best deer-in-headlights word salads ever.

Lee: Would, [by] the same token, the SEC investigate big up days?

Goody: [long pause] I think that big up days are a little different from down days…

Lee: Why? Doesn’t that speak to market structure as well? If you have the same circumstances that lead to a rise in the Dow of 3% on thin volume, why wouldn’t you investigate that?  If it’s really on the basis of market structural issues, why wouldn’t you investigate that?

Goody: Well, for one thing, it’s about market loss and investor loss.  And, so, while I think that that’s important to look at too, it’s more important to look at the loss because you have things like the high frequency traders, for example, and, so, once there’s a massive sell off, you have the ability for people in the market like high frequency traders to get out early. And, then, once the market starts coming around, to come up and buy in low, so they sell high buy low.  And, then, the average investor is going to act less quickly than the high frequency trader for example, and they’re going to lose money. And, then, with this volatility everyday investors are very confused by that. They hear “oh Apple’s doing very poorly, or Apple’s doing very well and so maybe I should buy or sell.”  And, the average investor is going to act more quickly to, uh, minimize loss than they are to get a gain.

Evans: Teresa, I don’t quite follow that.  If they’re front running, they’re front running. Whether they’re shorting or they’re on the long side, either way if you’re front running the public, and that’s a market structure issue, we talked about this a couple of years ago…it’s one thing for investors to…lose money, as you said, but if you also can’t buy something because it’s artificially moved up 10%, you’ve also lost out. So, it’s gotta go both ways or it doesn’t hold water, right?

Goody: I agree with you.  And, I think that the bigger concern is when investors are losing a lot of money. But, I completely agree that there’s also an issue when investors can’t get in because it’s artificially high.  And, this goes to your point, too, is that what we’re trying to find is the real valuation.  So, anything that negates the integrity of the real valuation of a stock is something that has an impact on the market integrity and the market structure. And, so I agree, it’s big ups and big downs.

But the SEC and, I think regulators, is more concerned with everyday investors losing a lot of money rather than not being able to get money and the gains because there’s more of an impact there, especially when its 500 or 600 points decrease.  But, I think they need to look into both and this way, also, when you’re looking at a decline, whether there’s front running, whether you know, some traders are able to sell high and start a sell off, and anticipate a big sell or a big purchase, and then they can get in front of that too, so those are issues where you can get more of the manipulation and the fraud.

On that holiday-shortened trading day, the S&P 500 opened down 16 points and closed down 49 points. It’s highlighted in blue in the chart below.I couldn’t agree more that an investigation is warranted.  In fact, it’s high time the SEC investigate the rampant market manipulation that occurs on a regular basis.  Let’s start, though, with the much more frequent instances where the manipulation results in huge gains in the markets.

On the 24th, members will remember, Mnuchin called in the Plunge Protection Team — which aptly manipulated markets into a sharp recovery by crushing VIX to the tune of 50%.This is a common occurrence as we saw again last night.  After five sessions of declines, ES broke out overnight and is currently showing a 25-pt gain.The primary reason?  Again, VIX — which was slammed by over 5% overnight and 23% since Wednesday.By all means, let’s investigate market manipulation.  But, if we really care about market integrity, let’s investigate those manipulating it in both directions.

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