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Wednesday, December 14, 2011

Stock Market Manipulation: A New Shorting Technique

As noted in an earlier blog entry (http://jgcaesarea.blogspot.com/search/label/Uptick%20Rule), I do not advocate an outright ban on short sales in the US, as this would interfere with the efficiency of markets, i.e. interfere with the pricing of shares in accordance with their true value. I do, however, support reinstatement of the "Uptick Rule," which would prevent downward manipulation of share prices by market sharks, which has cost many small companies their lives, thereby adding to unemployment.

The Uptick Rule went into effect in 1938 in response to market abuses that threatened the health of the US economy, and prohibited short sales of securities except on an "uptick". As summarized by the SEC:

"Rule 10a-1(a)(1) provided that, subject to certain exceptions, a listed security may be sold short (A) at a price above the price at which the immediately preceding sale was effected (plus tick), or (B) at the last sale price if it is higher than the last different price (zero-plus tick). Short sales were not permitted on minus ticks or zero-minus ticks, subject to narrow exceptions."

The Uptick Rule was cancelled in 2007, thereby enabling hedge funds to short shares, i.e. sell shares they did not own, in almost unlimited, immediate quantities, and permitting them to benefit from resultant investor panic in almost any given traded company.

Since the cancellation of the Uptick Rule, I have seen instances where hedge funds have shorted shares of a given company and have then consistently sold additional shares of that company into the market every day during the last seconds of trading, i.e. the closing, to provide the impression that the shares are trending downward. This illegal technique, which has been around for decades, is known as "painting the tape."

More recently, I have observed that certain "creative" hedge funds, which have shorted shares in a given company, are engaged in a new manipulative technique: Every time the shares of the company rise on the market, they sell short an additional 100 shares at the bid, so that investors will not perceive any upward movement in the shares.

Where are the market regulators?

1 comment:

  1. JG, if the uptick rule was cancelled in 2007, then it should be considered one of the factors in the stock market crisis of 2008. I read about the incipient subprime crisis in July 2007 already. So nothing concrete was done in the following year to prevent it from getting worse. And cancelling the uptick rule could only favor a worse situation. Culminating in September 2008.

    But I think that the agitation by ACORN in the early 1990s in favor of giving mortgages to people who couldn't pay them back or were unlikely to be able to, was a major factor too in the subprime crisis. And there our friend Obama bears some moral responsibility since he came out of ACORN even if he wasn't working for it in the early 1990s [already in the state legislature then, I believe].

    Now in July 2010, the Dodd-Frank Wall Street Reform Act was passed. If, as you say, the uptick rule on short selling was still not reinstated by that act, then it sounds like somebody was very reckless, almost inviting destructive speculation to bring stocks down.

    What I don't understand is how short selling promotes market efficiency, as you say. Even with the uptick rule. But allowing the hedge funds to run loose shorting with gay abandon sounds very reckless.

    What I would like to be able to do would be to show that Obama and Geithner share blame for the 2008 market crash and economic crisis. Obama was part of ACORN and Geithner --as head of NY Fed-- advised Bush not to save Lehman Bros. as Bear Stearns had already been rescued, as I understand. Of course, there were a lot of things wrong with Lehman and other brokers and investment banks. But it would have been a lot cheaper to save Lehman then [9-2008] rather than let the system crash, as happened.

    Meanwhile, I am enjoying watching the Eurofools, led by the Germans, bring down their own currency and their own economies. I just heard the Italian minister of development [on Italian TV] explain that the Greek debt crisis of 2010 had been badly managed. I couldn't agree more. And these Euroclowns tell us what to do.

    http://ziontruth.blogspot.com/2011/10/euro-fools-cant-solve-their-own.html

    Shalom,
    Eliyahu

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