Insights From An Ex-Wall Street CEO On Market Manipulation

Tyler Durden's picture

Submitted by a reader.

I am Ex CEO of mid sized Wall Street Firm. Known for equity research; reasonably good trading; acceptable Investment Banking. Now retired
Equity Block Trader early in career. May have traded more 1,000,000 share blocks than anyone over 10 year period.

Executed 1st program trade that I am aware of.  Manually handled blocks of stock vs options on the XMI for expiration October of 1983.
Oversaw global equity trading, for top 5 firm.  Was senior trader and oversaw hedge book during 87 crash.  Still have time and sales from that day for all trades on NYSE.

Can read the tape as well as most.

I cannot come up with any explanation for market activity for last 15 months other than treasury intervention.   Probability of other explanation is nonexistent.

But if that is the case…and I was Tim, how would I work it…starting in March 09.

1)    I would only have one … at most two … firms involved.  And only 3-4 at those firms…although it is more likely 10.   (My bet is JPM).

2)    I would assume that I had TARP money or other unaudited Fed money to work with (ZH has documented past documents that tangentially referenced this possibility) and it would be north of 10B allocated.  With leverage thru the loan process…much bigger.

3)    I would –as you have suggested – wash the order thru liquidity loans to my 1 or 2 firms; with the understanding that they would buy equities that they would then deposit as collateral for such loans.  That way I could almost time my equity support for the market with a notional understanding that I wanted the “ collateral” created and posted in a very short time frame.

4)  Not on paper, but at the coffee house, I would discuss how I generally  would support a steady underlying bid to keep sell-offs limited. To use quieter times to make the push (as ZH points out…rainy days and Mondays never get them down).

Now I suspect they started with noble intentions. The Minneapolis bridge is out and we need an alternative for just a short period.  But it worked so well, that their 10B investment thru leverage and gains became worth a great deal more and now they were working with house money.

Even if they ever got audited; they had a winning trade.  And even better, they could make some losing trades and still be ahead of the game. After all, no side pockets needed.  No outside investor. No redemption provision at all.

So now we get cute….

We actually take the market up on light volume…especially since we have VIX low and complacency rampant.  Now I can even sell some volume at an intraday loss. I am still way ahead of the game…. And I replenish my capital to keep the support up.

It’s a inside Ponzi game and I am using my winnings to keep it going.

But…. Where are the hedge funds?  Why do they let me get away with this.  Well, I didn’t expect to be able to have this much effect, but I caught them short and then with rates so low that any idiot bank could make money 90 days In A Row, they turned and stayed with the tide.

I do not think this plan leaked, because if it did, they would have run in front of me in such a major way; but the tape stayed steady, steady.  But they did appreciate how much help we were for C and friends and they kept their stocks in safe zones.

The only leak was in a soft way to CNBC by telling them we had their back if they had ours.  And I don’t think they realize the extent to which we appreciated the “benefits” of our friends.

And we feel morally OK.  We did a good thing keeping the markets from collapsing.  After all, we are only crafting that temporary bridge, until traffic can resume going 65 mph.  And boy is that taking a long time.

But now it is a drug.  And we have drug money to keep it going.  And we know how the process works.  Se we get O to call Angela and say; this drug puts the wind at your back.  You have the shorts just where we did – and with that start, you too will soon have a positive trading account that you can lever up.  OPM leveraged up.

But now what……you would have thought that Larry Liebowitz would have mapped out the joint circuit breakers given his background.  (BTW he is Jon Stewart's brother)

We ended up selling when we should have been buying and we are now in the negative column (speculation on authors part).

Stay the course.  Trichet to the rescue.  Only one mistake.  Currency markets just a might bit bigger than equity markets.  And one can support the equity markets all day long with enough money but if you take the carry support away……

And so I think the hangover effect will set in and Uncle Ben will say to Timmy….that was a terrific and successful experiment.  But I don’t have more TARP money to double your equity bet.  You can keep your bet on until I get forced to sell some mortgages….but enough of adding. Let Trichet carry some water for awhile

………………………..

Author again… so that’s how I explain light volume during the day, followed by sharp volume bursts down.  Not the algo’s….but rather Timmy.  And its like he gives them a dollar amount to raise…and then walks away.

Who knows…it could have even been Timmy who set the Thursday action into motion, but for the first time he did it simultaneously with other large sellers worried about intl markets.

We have met the enemy and he is us.

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Double down's picture

I. Salute. You. Sir.

i.knoknot's picture

"Now I suspect they started with noble intentions."

i want to believe that. regardless of where it has gone, i really want to believe that.

i just wish it was more 'soft-landing', rather than 'prop-and-hope'.

snap.

(good read, tnx)

mikla's picture

Now I suspect they started with noble intentions.

Doesn't matter.  Intentions may be a consideration at sentencing.  However, they are irrelevant at trial.

abalone's picture

So does that mean Europe will be left holding the bag?

Dirtt's picture

Setting up the fall guys?

floydian slip's picture

No fall guys, national security!

The terrorists are doing it. Either that or we are in a economic war with China which will itensify if China don't play ball and pretend terrorists are doing it.

Timmy had to do what he did for America.

/sarc off

 

FEDbuster's picture

All's fair in love and war.

Blowing up the bubble, one collective breath at a time.

Matto's picture

Have been thinking about the PPTs reach and the sheer weight of the foreign equity markets, the FX markets and the bond markets. The tide will turn and this little game will be nothing but an eddy current when it does.

This sight has some great explanations on how the PPT works and what to look for in the markets to see their action - i've only recently found it and am still working through a lot of the info myself:

http://www.gamingthemarket.com/

 

gamingthemarket's picture

Thanks for the props!  If there is anything I can clarify, or you have some research ideas, please let me know.

Brett in Manhattan's picture

With those credentials, this guy can't explain the recent market?

How about this? It's the same game it has been for last 100+ years: Accumulation/Distribution.

Exchange members accumulate at wholesale, distribute at retail, pull the rug out, scare enough people into selling at lows, rinse and repeat.

The only difference between this market and typical bull runs is that this one was preceded by an abnormally large crash which, in turn, requires an abnormally long bull run to unload the inventory on the public.

ColonelCooper's picture

Actually, I think he did explain it, and rather well. 

hedgeless_horseman's picture

Agreed, Brett.  As certain as the tide.  Of course, does the same accumulation/distribution thesis work with gold?  Of course it does, but on a different sine wave.  Who does everyone think they are buying their gold from?  Miners account for a minority percentage.  I try to always start from the premise that their are always two sides to a trade.  People too often forget it.

Fraud-Esq's picture

Thanks reader. Thanks ZH. I was hoping this would happen. I hope you started a trend.

Where does the Big 6 everyday trading profits fit in? I was thinking the other way, the big 6 win everyday, the gov joins others in losing/passing gains on, a little subsidy to banks without a vote - and well intentioned too, right? Just re-capitalizing without int'l glare at the details. quietly.

There's something odd about the brazenness of the "no trade day loss". It seems deliberate. My theory: It's brazen on purpose. It says, "hey, China, Europe, Japan, everyone....LOOK. we're not letting it drop, NO MATTER WHAT. What else ya gonna do. Look at Europe, come on....we're not going to screw ourselves, so you're safe" And, that might be exactly the intention.  

i.knoknot's picture

uh oh, you're starting to think like they want you to think... :^)

when i start that, i picture the scene in 'princess bride' where they're wagering over the iocane laced wine.

"never start a land war in asia..."

aurum's picture

inertia always wins. no matter what. these banks are still insolvent if you include FAS. it will all end badly but for the better.

ratava's picture

sounds like a smart move. typical smartest person in the room option. so they figured that by printing that money back in 2009, the lack of liquidity would provide them with an option to obtain absurdly profitable positions. Now that they are holding a bear rally after a rejection of .62 and noone believes there is a reason for the stocks to go any higher, they probably feel a bit less smart. there is a lot of questions, though. do the Chineseknow? do the Americans know the Chinese know? does it have an effect on policy decisions and is that a treason? they can still see it as an action in the nations best interest.

Trial of the Pyx's picture

Now this...this is why I read ZeroHedge

Duuude's picture

Janet Tavakoli

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Chicago residents grew up to the sound of local early morning radio rundowns of pork belly futures and other exchange traded commodities. Every trick in the book from manipulation of soybeans to silver has played out in Chicago's trading pits. Every market professional I've talked to in Chicago since Thursday is of the same opinion. It makes no difference whether human beings or computers are front running and manipulating trades. The gyrations in the market last week have the look and feel of classic market manipulation.

If you want to manipulate a market, deregulate it as much as possible. Then make it as "dark," and fast as possible. Make it hard for outsiders to view your trades as they get done, and make it even harder for anyone to figure out why you are trading. Get as much monopoly power as possible over the market. Get funding at the cheapest possible rate. The best possible rate is the near zero cost funding available from the Federal Reserve.

Next, get your "men" stationed in the most influential positions at the exchanges. Make sure your cronies have shock and awe market dominance through, say, High Frequency Trading algorithms that now make up the majority of stock trades.

Then, make sure you have advance information of major market-moving events. A bailout announcement by the European Union would do nicely. A few days before the announcement, "bang" the market. Pound down the value so you can monetize put options and other bearish instruments. Trigger customers' stop-loss orders, and pick up bargains at their expense. Then cash-in again when the market pops up on bailout news.

http://www.tavakolistructuredfinance.com/TSF72.html

Goldfinger's picture

The finance game in a nutshell. That's how the big money is made, create a panic. 

jeff montanye's picture

imo zh should be several levels north of obama's website (re: earlier just for fun post on website rankings).  stuff like this may move them both.

bob_dabolina's picture

It's all regardless.

There is no entity that can control the market.

It really comes down to the fact that the market always wins. It might take a day, it may take a week, it may take a month or a year.

The shit always falls on your face when you're upside down and a cock in your ass with a gentlemans balls nestled against your nostrils. Thats the market. Bottom line.

-Insider trader for life - I dare Cuomo to catch my trades. Biotch.

subqtaneous's picture

Dood!

I read this on a urinal stall last weekend, and I nearly wept.

(poor little greenie)

 

Cheeky Bastard's picture

Are you so sure about that.

Here you go, read this please, maybe it will shine a light on your misconception of the market structure and clusterization of ownership and capital.

No need to say thank you or anything. Read the this paper and you will find out that you do not need a dominant player in the market, just a cartel of maybe 10 institutions and 3-6 month trading strategy defined in detail. With top 10 institutions owning 87% of Worlds equity it is really not a problem to play the market. Also defining probability distribution on a day-to-day basis like it is done by proprietary trading desks, no matter how good the variables of a larger distributive environment are in your favor, they also can not defy the laws of probability distribution. Now with all that said do you still believe the market to be to big to move.

This paper was written byGlattfelder and Battiston of Swiss Federal Institute of Technology in Zurich and will give you a much needed perspective on the ownership structure of total market volume/value.

http://arxiv.org/PS_cache/arxiv/pdf/0902/0902.0878v2.pdf

buzzsaw99's picture

With top 10 institutions owning 87% of Worlds equity it is really not a problem to play the market...

I agree. The treasury acting alone (or even with 1 or 2 big firms) couldn't pull it off undetected but they are by no means alone. All the major holders have an interest in having the market rise. As long as there are no margin calls and no-one needs to raise cash it can work.

Cheeky Bastard's picture

Dude, if you have the time and the will, click on the link in my comment and read the original paper [not the oversimplified garbage that was reported in the media about what said paper says]. It really is unfathomable to someone who does not follow this very closely, that only 10 large institutions [mostly MF, IB, CB-IBSDs] own outright or indirectly 87% of the capital traded daily on all exchanges in the world. It is a closed loop and distribution of ownership percentage among those ten changes on a daily basis, but the total never goes down. Like energy, it only transforms [in this case changes hands], and it is never destroyed. 

velobabe's picture

ohhh,,,, mr busy.

always proving up.

WASTE, never destroyed, problemmm.

 

just out of curiosity, what's the demographics of this crowd at 4 am.

europe, asia, africa, else, sleepless in seattle?

quote HST...... “when the going gets weird, the weird turns pro”.

party on.

buzzsaw99's picture

I take the premise of that paper as a given without necessarily claiming to follow the fancy math and summation systems equations. IMO any number of "they(s)" can easily bring prices down by selling a mere portion of holdings into this thinly traded market. However, keeping it up, without a marginal (stupid money) inflow becomes a dicey proposition after awhile (unless they mean to endlessly debauch the currency and further distort the real economy with more bogus margin lending to miscreants, gamblers, and deadbeats). The next few years should be interesting.

velobabe's picture

just saying, been wanting to say.

that is a hard pic to look out, mr buzz†

buzzsaw99's picture

Hey velobabe! Looking good! You are more than making up for my lack of aesthetics.

buzzsaw99's picture

What this market needs is more cowbell:

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

 (:snickers;)

 

 

velobabe's picture

yep, really like my coffee with this much hysteria.

once there was a, i need more cowbell avatar here.

yeah, maybe will ferrell's tummy is as offending as your face.

 

 

depression's picture

It's like they planned a party for 100 guests and only 6 people showed up.

Now they are standing around with their hands in each others pockets wondering what to do next.

buzzsaw99's picture

He who panics first. Steady boyz. lol

bada boom's picture

Yep, and the food is starting to go bad.....

bingocat's picture

Which "top ten institutions" own "87% of Worlds equity"? I actually read the Glattfelder/Battiston piece a while ago, pointed out by a friend, and I did not come to the same numeric conclusion. I noted showing up as a "Power Holder" was more a measure of diversification of reportable holdings rather than capital under management. This is obvious with someone like Dimensional Advisors having been noted as #7 power holder. There is a combination of data 'survivorship bias' and arithmetic/weighted mismatch going on here.

While it was an interesting study in concept which had a flaw in its conclusions. It was basically an observation that local Herfindahl Hirschman index of ownership was high for 80% ownership levels, and that certain holders in the top shareholder lists show up everywhere, therefore those who show up with most consistency must own everything. The problem is that the global HHI concerning global ownership would show up a LOT lower. The identifying model for this is that the Capital Group companies as #1 don't own 5% of global market cap and Dimensional (#7) owns significantly less than 1% of global marketcap.  

The fact that the top ten are effectively fiduciaries for other people's money should mean that corporate governance is better than it actually is unless the top ten view themselves effectively as closet indexers plus alpha.

While I have not done it with my database (I will this weekend), I expect we would find out that the top ten holders of global equities (ranking of all holders of all equities everywhere) hold significantly less than 50% of global marketcap. It should be easy enough to prove by finding the top 5 equity asset managers globally out of a recent II issue and matching that against global marketcap.

Cheeky Bastard's picture

Yes, sorry; i fucked it up. I have not, actually given enough thought and forgot to differentiate between volume and value, and not only that but did not bothered to read the appendices bellow the main body of the paper and missed this little uncertainty into methodology employed in this article:

While ownership is an objective quantity (the percentage of shares owned), control (reflected in voting rights) can only be estimated. In this appendix we provide a motivation for our proposed model of control Hij (defined in Sec. III.2) from an economics point of view and discuss how our measure overcomes some of the limitations of previous models. There is a great freedom in how corporations are allowed to map percentages of ownership in their equity capital (also referred to as cash-flow rights) into voting rights assigned to the holders at shareholders meetings. However, empirical studies indicate that in many countries the corporations tend not to exploit all the opportunities allowed by national laws to skew voting rights. Instead, they adopt the so-called one-share-one-vote principle which states that ownership percentages yield identical percentages of voting rights [31, 43]. It is however still not obvious how to compute control from the knowledge of the voting rights.

Also it seems as if they did not take into account dual structures, partial floats, potential of buybacks etc etc. So, yeah, it seems that you could be right with claiming that top 10 would hold significantly less than 50% of market cap. Thanks for the news perspective on this, it made me look into the article more deeper than when i read it first and took it at face value [without not even reading the appendices which show more than they hide] and actually question the methodological approach used by the authors. Theoretically every publicaly listed corporation could become private tomorrow imploring buybacks and shatter the whole thesis put forth by the authors. Also, im not sure, but it seems as if the assumed they are dealing with a static flow of ownership claims instead of dynamic one.

Well, nevertheless, thanks for pointing out the flaws in both my post and the paper.

bingocat's picture

Not sure if your response is "cheeky" or not.

My problem with the study was that the "probabilistic voting model" off the Cubbin/Leech 'degree of control alpha' means that it does not matter how large the large shareholders are within a dataset with a high HHI - it automatically assumes that the tiny guy will go with the big guy whoever it is. And within datasets with a very low HHI, well... obviously the big holders have the majority. That makes the 'result' of the study a foregone conclusion - they could have started with the Appendix and stated "quod erat demonstratum" and left out the rest as long as the local-market HHI was low. Their "proof" was the presence of pervasive breadth by a certain number of names within the existing dataset (at the top of the pile).

It is not to say that voting patterns don't actually end up that way in reality, and the history of crowd study would suggest that the sentiment behind the 'degree of control alpha' model is not to be taken lightly, but I thought that the biases embedded in their version themselves (and not the data) determined the result of the study,

FWIW... the history of activists in non-Anglo-Saxon countries would object to the conclusion, and there remains the very significant issue of how 'non-votes' are counted in different regimes. In some countries, non-votes actually count as default support for management proposals.

I don't think the buyback aspect shatters the thesis at all - someone has to sell to those buying back (or LBOing).

Cheeky Bastard's picture

No, no, no; I was not being Cheeky this time. I just wanted to say that i overlooked some things in the paper which I took at face value the first time i read the paper; which was almost a year ago. As I said; i really do thank you for pointing them out to me. 

lesterbegood's picture

Cheeky not cheeky?! Say it is'nt so?!

Cheeky would'nt be Cheeky if he was'nt cheeky!

Hansel's picture

I don't know an exact percentage, but I would guess the biggest banks do own most shares because...

Most individual "shareholders" are simply unsecured creditors of their brokerage.  The brokerage, in order to clear through DTC, has to deposit its stock inventory with Cede and Co., a partnership whose partners I could not find with a quick google search, but I presume is the biggest banks.  Cede and Co. is the named owner of nearly all stocks.

bingocat's picture

Cede & Co is a technical fiction to deal with processing technology of 30+years ago. It is "owned" by DTC. It has not changed as processing power has expanded by orders of magnitude of orders of magnitude. It simply has not changed because it has not changed. It is required by law to pass everything (votes, proxy materials, etc) to the next level below it (which for the sake of technology is going to be the custodian for your broker, then your broker, then your account within the broker). 

Individual 'shareholders' are not simply UNSECURED creditors of their brokerage (at least any legitimate brokerage) because of the law against co-mingling of assets. IF the broker is breaking that law, then you become an unsecured creditor of the brokerage (and probably its directors and executives) but even the pessimists among the peanut gallery aren't usually that biased to assume so.

 

Breezeway's picture

Thanks for the link CB, I've been looking for this critter. I did find it, but was too stingy to pay the $25 for the abstract. Hope the  best for your health.

Mark Beck's picture

Add a little pressure and the coalition will crumble. At some level of price the players will break ranks. It is happening now. They must lock in performance for Q2 results. The exit sign is in sight, it is just a matter of how fast we walk.

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I really did not see a jump in jobs due to ARRA so far this spring. Why? This is the sweet spot year for the ARRA projects.

Why is Treasury not releasing the funds? Very strange. My only guess is to reroute funding to help the state budget shortfalls, in what ever fashion they can dream up. It is just very strange the pace of outflows.

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Any guess to when we will see the collapse of the sovereign debt market?

In the US, a small trigger will set in motion a callapse in the debt markets. So be on the look out for fallout from a small city or principality default.

It will be a wake up call. The system will collapse from within unless the Treasury/FED put into motion a state bailout plan. If they want to maintain confidence they should announce something this month. I would expect another long term T buy program to go along with the legislation.

But really, they need to act quickly.

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I guess it is conceivable that we will have riots in LA this summer, and the big banks still recording record profits. There is a disconnect between what is really happening at the state level and what the big banks/FED preceive as economic health. The FED has created a support structure for the banks which extends far beyond any sustainability in growth at the state level to fund this debt, or even matching Medicare/Medicaid. The states can now longer afford the governments failure to control price on services and drugs.

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Is our central government outside itself? Through FED fiat power, is has broken away from the states and citizens ability to fund federal debt. Essentually, we have lost any real connection of worth to our currency. What is backing it without economic health at the state level?

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I would like to also bring attention to the fact that in this fiscal year the CBO is now hinting that we will not have a SS surplus for the first time. ZH commentors have been saying this would come a lot sooner than the CBO estimated. Which just 6 months ago was 2015.

Mark Beck

AnAnonymous's picture

Small trigger. Everything can be small. So far, everything has been too small to trigger. Sets the magnitude required to trigger anything and what small means.

 

World cup starts in June. Will help to prevent riots. Later, Olympic games. 

Jack H Barnes's picture

Mark,

Per your ARRA funds issue... You are correct, I know of a muni that was funded a package of Grants & Loans to pay for a *very high* priority capital project, fully endorsed with State & DC support at all levels. 

The funds are missing in route, they left the US T, but have not made it to the Muni to fund the over due project.  The State Capital is sitting on the funds and has not released the funds. The city may have to go to a full commerical based loan for the whole amount, as the ARRA funds are stuck but not talked about, at the state capital. DC ConReps are aware of this issue, and said they will rewrite the closure date if necessary, in a rider to make sure the funds get released to the Muni if the State sits on the funds to long.

The grant side of the package is 7 digits, which obviously the Muni doesnt want to have to capitalise in the project if it doesnt have too.  Said project is already 100% over first budget (5 years ago), and still growing in size, as time ticks away.

The only good news is that said muni, is actually running a profit, has deep cash reserves, and a balanced budget with zero bonded debt.  It can afford to shop for new funding for this project, but it cant wait for ever.  The Muni manager is looking at going to the state capital to make a political scene, to get the ARRA funds released.  These are USDA funds...

Eduardo's picture

The DAX is certainly behaving in a weird weird way ... and today is a good example of it

doomandbloom's picture

now only if the HFT programmers could explain their programs for us...

Yes We Can. But Lets Not.'s picture

So equity markets are rotten to the core? 

Is that a good place for an ordinary shmo like me to have my retirement monies invested?

For tens of millions of ordinary shmoes?

el Gallinazo's picture

Certainly.  Buy more on margin.  Shop until you drop.

FEDbuster's picture

You will have much more fun with two $1K hookers at your side at the craps table at the Hard Rock in Vegas this weekend.  With about the same odds of success at the table, the hookers are a sure bet.