I often hear people say stock markets are manipulated by some big people. Now if that was true insurance companies or sovereign wealth funds will be the best performing portfolios as they have the largest funds. However if you do a study you’ll find most of them are unable to beat the markets.
So why does this happen? We think of manipulation when something unexpected happens. Something which we could not have thought of or could not explain with simple logic. I’ll give you instances:
1. For traders, I have seen once their stop losses are hit regularly and if the market reverses from there, they think its manipulated. Obviously someone knew about their stop losses. Now we have two conclusions to derive from this, if our stops are being hit regularly and market is reversing from their:
A. Market is manipulated
B. Our stop loss methodology is too predictable for the trader sitting on the other side. It means most of the people have stop losses at the same point or use the same methodology as I am using, which is too predictable.
Generally, if you remember the outcry system, think from the point of view of a market-maker or a large broker he has to sell or buy huge order. From their experience of years they have honed the art of taking a large position without moving the market much and they have developed some sense to realise where most people are putting their stops. But does it mean, they can’t be wrong, no they loose millions if they are wrong trying to hit stops of people (Their is risk in every trade).
For example: most people put their stops on highs or lows, or use 50 DMA, such things are very common (Stops are very predictable here).
There is no exact method for the brokers to know the stops, however it is easy to sense where the stops are located from the behaviour of the other brokers. How exactly it is done is beyond the scope of article. This is just a crude example: (Please refer Dynamic Hedging – Nassem Taleb – Page 71 Example from there):
Lets assume a large European fund manager gives a Canadian Bank a stop loss for $300 million against the Canadian Dollar. The present rate for Canadian dollar
presently trades @ 1.38 and the stop loss is @ 1.3750, considering it is very low volatile.
Another Trader in New York, notices after few hours the price of starts falling from 1.38 to 1.378. Soon he thinks he could push the market towards stops being hit, (Provided no other real buy orders come). He starts heavy selling, seeing that other traders decide to step back because they are suspicious of him having some information. As the price hits 1.375 heavy selling due to stop loss hit takes place and the trader puts a buy order @ 1.3725. (Profiting from the trade)
Now in the above example, you must be thinking its so easy, no think if some buy orders came in before he would have losses running in millions. This is an approx example.
So its only your attitude, if stops are being hit regularly, means your stop loss methodology is wrong, not the market is manipulated.
2. Some people say in hindi “Bhav bad gya fer results ache aate hai”-
Price predicts results. Now it simply means market as a whole is more intelligent than you alone to realise their is a high probability that in future results of a company will be good. If you have reason to believe otherwise you can take an opposite position.
It does not mean market is manipulated. Market is future oriented and generally right most of the times.
3. After a price rise too fast within a negative environment – people are uncertain unable to explain the moves – They’ll think someone is manipulating. However, it may also mean the market as a whole has better future predictive powers than you may think or simply you may not understand the reason why price is rising/falling does not mean market is manipulated it means you do not understand it.
I believe it largely is a difference of attitude – If you are humble enough you will understand you can’t explain everything. If you think market is manipulated it is largely your ego at play. (Read Wisdom of Crowds- by James Surowiecki) The crowd (in our case is the price) is right most of the times. However, most outsized returns are made when the crowd is wrong (which is rare).
Yeah I understand very rarely one or two stocks may be manipulated for a week, but it is very rare if you have done your study well you’ll be stuck into them. Same goes for frauds if you are stuck into a fraud your mistake is equal as the person who was culprit, your analysis didn’t help you identify a fraud.