Manipulating the Stock Market

The dramatic ups and downs of the stock market indicate to me that it is being manipulated by big, wealthy investors.  If the stock market is really representative of America’s business value, it is hard to believe that America is worth 3 to 5 percent more on one day than it was  the day before or will be the day after.

These huge market swings seem to be the result to algorithmic trading by wealthy investors, such as hedge funds or wealthy individuals.  The big swings seem to be in part momentum trading, fast traders staying just a little ahead of market increases or declines, but making money whichever way the market goes.

Often these big swings happen before the market even opens.  The market will open 2 or 3 percent above of below where it closed the previous day.  I don’t know how the momentum traders play this.  If they close out their positions at the end of the day, they miss the big swing that occurs during the night.  I don’t think the futures market is big enough for all these traders to play in, although there may be “dark” trades that take place off the public market.

In any case, it looks suspicious.  It looks like on most days the fix is in to either shoot up or drop down, often for no particular reason.  If the market goes up on bad news, the commentators often justify it by saying that the news was not as bad as expected.  Of if it’s good news and market goes down, then it’s “buy the rumor, sell the fact.”

In fact it’s just a bunch of powerful computers and smart guys watching the market and the news and staying one step ahead of the ordinary investor.  On the one hand you can argue that over the long term, the market operates as it should; the ordinary investor can make money if the economy improves despite the daily ups and downs.  On the other hand, you have the Jim Cramer meme showing the Dow’s best week while 16 million Americans are laid off their jobs.

The Wall Street Journal reported:

Retail sales, a measure of purchases at stores, gasoline stations, restaurants, bars and online, fell by a seasonally adjusted 8.7% in March from a month earlier, the most severe decline since record-keeping began in 1992. Earnings for the first quarter among big U.S. companies are expected to decline nearly 15% from a year earlier, according to FactSet, which would mark the biggest decline since 2009.

Still, as the data has darkened, investors have been buying stocks, extending the Dow’s rally from its March low to 30%. It is a sharp about-face from March, the most volatile month in the stock market’s history, when the 11-year bull market in equities abruptly ended.

Where is all of this money coming from that is pouring into the market?  A lot of it comes from 401(k) pension plans.  According to Wikipedia:

Direct ownership of stock by individuals rose slightly from 17.8% in 1992 to 17.9% in 2007, with the median value of these holdings rising from $14,778 to $17,000.[13][14] Indirect participation in the form of retirement accounts rose from 39.3% in 1992 to 52.6% in 2007, with the median value of these accounts more than doubling from $22,000 to $45,000 in that time.[13][14] Rydqvist, Spizman, and Strebulaev attribute the differential growth in direct and indirect holdings to differences in the way each are taxed in the United States. Investments in pension funds and 401ks, the two most common vehicles of indirect participation, are taxed only when funds are withdrawn from the accounts. Conversely, the money used to directly purchase stock is subject to taxation as are any dividends or capital gains they generate for the holder. In this way the current tax code incentivizes individuals to invest indirectly.[15]

Retirement plans like 401(k)s tend to be less active and basically become a huge pot of money that the fast traders can make money from.  If the market is much bigger, every little blip up or down can be more profitable.

Nasdaq has already warned about the possibility of market manipulation:

There are many old-fashioned forms for market manipulation, but I’m not sure the current process is covered and is illegal, although the result is the same as with the old methods.

The other thing that has changed is the overall size of the market.  This is significantly driven by the decision of large corporation to quit funding retirement plans and force employees to fund their own retirement through 401(k)s.

84% of all stocks are owned by the wealthiest 10% of households, according to the NYT.



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