Summer reading: Market manipulation and gaming

There’s nothing but bad news coming out of Wall Street these days. From bear rallies, to exposés on the likes of Goldman Sachs, to current accusations of widespread market manipulation. To put it in plain English, there’s more than just a bit of speculation that there are people who understand the workings of the stock markets so well that they are able to make fortunes by manipulating it.

Their fortunes depend on ordinary folk continuing to invest, blindly, in the misguided belief that stock prices are guided by the mythically righteous hand of the market. Cynics say: oh you silly fools.

This is a bit off the CEE property trail, but it’s part of a larger theme, which is that the roots of the current crash run far deeper than the activities of a bunch of rapacious mortgage agents in the US. The recent nonsense again involves Goldman Sachs, a company that’s really beginning to need a new public relations strategy. The news story, to be found at Bloomberg, is that a former Goldman Sachs employee earning $400k per year stole proprietary software that enables the company to anticipate market movements during the day. The employee was said to have switched to a new start-up planning to do high-volume automatic stock market trading.

Why does this matter? Themistrading.com tells you why:

The proprietary code lets the firm do “sophisticated, high- speed and high-volume trades on various stock and commodities markets,” prosecutors said in court papers. The trades generate “many millions of dollars” each year.

Markets are a zero sum game – somebody wins and somebody loses. Where do you think these “many millions of dollars” are coming from?  They are coming from you – the average retail investor and the large institutional investor.  These programs are taking advantage of real order flow and are siphoning off small profits throughout the day that belong in the pockets of the retail investor and the traditional money manager.

If you happen to find this interesting, or sense where the danger lies, read this post, also by Themistrading, which we found via Zerohedge. The long-term angle here is that transparency is likely to become an increasingly crucial sticking point investors, something property developers and companies should be taking into account.

Update: Just to demonstrate that this isn’t a joke, look at this link, about how an investigation is being launched into Goldman’s admitted ability to game the stock market. This quote is from a letter by Chris Powell, secretary/treasurer of the Gold Anti-Trust Action Committee:

If the report quotes the assistant U.S. attorney correctly, and if he was characterizing Goldman Sachs’ position correctly, then Goldman Sachs claims to have possession of a computer trading program that can manipulate markets. The assistant U.S. attorney’s comment can be construed to suggest Goldman Sachs considers its own manipulation of markets to be fair, while such manipulation by others would be unfair.

Basically, it’s like a casino operator, (in this case Goldman Sachs), trying to beat up a card counter (i.e. the guy who stole their special software).

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2 responses to “Summer reading: Market manipulation and gaming

  1. isn’t it obvious how the “finanial sector” in the “economy” became the tail that wags the dog? mind u….econ101: the buying and selling and bying and selling of the same already issued shares IS NOT COUntED AS GDP. and yet financiers make SOOO much money not backed by genuine production. we are the chumps really…… they the playuhs.

  2. Pingback: Market madness « CIJ Blog

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