Wednesday, March 28, 2007

How to manipulate the stock market

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An interesting account of what actually drives the market. By Jim Cramer in a video interview on TheStreet.com. Cramer is an ex-hedge fund manager (apparently 24% annual return from 1987 - 2000) and the host of CNBC's Mad Money.

Some choice quotes -
"You know, a lot of times when I was short at my hedge fund—when I was positioned short, meaning I needed it down—I would create a level of activity beforehand that could drive the futures. It doesn't take much money."

"What's important when you're in that hedge-fund mode is to not do anything remotely truthful. Because the truth is so against your view that it's important to create a new truth to develop a fiction."

"The great thing about the market is it has nothing to do with the actual stocks."



If you have a broadband connection, you can watch the full interview where Cramer gave his "veteran's perspective". Click here for the video. Poor interviewer Aaron Task's expressions with each of Cramer's revelations are priceless!



A more elaborate transcript is below...
"You know, a lot of times when I was short at my hedge fund—when I was positioned short, meaning I needed it down—I would create a level of activity beforehand that could drive the futures. It doesn't take much money. Similarly, if I were long, and I wanted to make things a little bit rosy, I would go in and take a bunch of stocks and make sure that they're higher. Maybe commit $5 million in capital, and I could affect it. What you're seeing now is maybe it's probably a bigger market. Maybe you need $10 million in capital to knock the stuff down.

But it's a fun game, and it's a lucrative game. You can move it up and then fade it—that often creates a very negative feel. So let's say you take a longer term view intraday, and you say, "Listen, I'm going to boost the futures, and the when the real sellers come in—the real market comes in—they're going to knock it down and that's going to create a negative view." That's a strategy very worth doing when you're valuing on a day-to-day basis. I would encourage anyone who's in the hedge fund game to do it. Because it's legal. And it is a very quick way to make money. And very satisfying."
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What's important when you're in that hedge-fund mode is to not do anything remotely truthful. Because the truth is so against your view that it's important to create a new truth to develop a fiction.
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The great thing about the market is it has nothing to do with the actual stocks. Now, maybe two weeks from now, the buyers will come to their senses and realize that everything that they heard was a lie, but then again, Fannie Mae lied about their earnings for $6 billion, so there's just fiction and fiction and fiction.

I think it's important for people to recognize that the way that the market really works is to have that nexus of: Hit the brokerage houses with a series of orders that can push it down, then leak it to the press, and then get it on CNBC—that's also very important. And then you have a kind of a vicious cycle down. It's a pretty good game. It can pay for a percentage or two."

2 comments:

Satish said...

hi arun,
I think its easier to manipulate Emerging Markets where the Watchdogs are sleeping.
cool stuff maan... shall blogroll.

cheers,
satish

Arun said...

Satish,

True. In emerging markets, there are more problems -
1.) As you mentioned, the watchdogs might not be active to the extent of the SEC in the US
2.) Even if the watchdogs are active, prosecuting and getting a verdict against somebody for insider trading would be very difficult considering the judicial systems. That is why in markets like BSE, there is a huge amount of trading based on insider knowledge because pple think that they will never get fined/jailed
3.) A lot more manipulation techniques will work in emerging markets as the regulatory watchdog technology might not be as sophisticated at detecting patterns of illegal trading
4.) In emerging markets, if you have power you can get away with a lot of things. Unlike the US where the more powerful you are the more likely somebody is gonna make a career out of prosecuting you.