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As I watch the stock markets melt down this week, I think back to my earlier post in which I made the case that manipulation in any field will always occur when you have these conditions:

1. Huge potential profit
2. Small chance of getting caught
3. Easy to do 

I'll add a fourth element today: Lots of participants. That's important because a million ants are more likely to find a way into your kitchen than three ants.

Today I saw some links to a highly analogous situation: Social media.

The bottom line is that companies and famous people are manipulating social media by buying fake followers. Why?

1. Huge potential profit
2. Small chance of getting caught (or at least small chance of meaningful penalty)
3. It is ridiculously easy
4. Lots of people on the Internet (some ants find the kitchen) 

Below are the links to the articles. Can you read this stuff and still believe that the recent moves in the stock market (and the inevitable 20% pullback yet to come for no particular reason) are not manipulation?

Growth hacking

Fake Social Media


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Jan 31, 2014
Amazon: Considered in isolation, the quarterly numbers were terrific. Revenue was $25.59 billion, up 20 percent from the quarter in 2012. Earnings per share were 51 cents, up from 21 cents.

But expectation is all, and Wall Street expected more. Analysts had forecast that the retailer would report revenue of $26.06 billion and earnings of 66 cents a share. The stock immediately fell as much as 10 percent, or $40.

-----

There is the manipulation, sell the stock, forecast too high (price drops) buy shares back. Buy the stock, forecast too low (price rises) sell shares. Just buy the Analysts....
 
 
Jan 30, 2014
This works if you have followers in order to show people how many followers you have. And perhaps there are a few people who will follow because "everyone is doing it".

When social media is used for commercial reasons the reason why you need followers is to market to them, to tell them about specials, to create enthusiasts. If all your followers are fake, they aren't going to buy your records/videos/books/products etc?

However as a person who works in marketing, I admit it is almost impossible to explain to clients that it is better to have 1000 real visitors who are potential customers, than 10 000 16-year-olds who come to get a free download.
 
 
-1 Rank Up Rank Down
Jan 30, 2014
"As I watch the stock markets melt down this week..."

"Can you read this stuff and still believe that the recent moves in the stock market (and the inevitable 20% pullback yet to come for no particular reason) are not manipulation?"

As earlier posters mentioned, by definition, participation=="manipulation". As participants seek to buy, they bid up the price. As others seek to sell, they lower the asking price. It all depends on supply/demand, and the willingness of participants to bid/ask.

Most stock market crashes do not come from some short seller looking to push the price down and therefore "manipulate" the market. Crashes happen due to a lack of bids (i.e., no one else willing to buy). This is why every time markets begin to deeply decline, the gov. decides to ban short selling, as if that were the problem. (Sorry, try again). It's a total lack of understanding of how things work.
Every time short selling is banned, it never prevents a decline. Why? There's just never that many short positions compared to long positions.

And now, in a very timely manner, I offer the following post about how stock prices work, specifically as it relates to this past week of turmoil:
http://politicalcalculations.blogspot.com/2014/01/completing-quantum-shift-in-future.html#.UuprzOJIn-k

 
 
Jan 28, 2014
I think there is a difference between saying the Stock market is rigged and saying it is "manipulated". Of course it's manipulated. If someone is selling and someone else is buying, the seller is hoping to get the highest price and the buyer is hoping to get the lowest price (and then wants the price to increase later).

The Stock market is an auction, but the process of bidding, buying and selling is controlled by brokers. The brokers all have various motivations for buying and selling. They are supposed to be regulated and monitored. If a broker gets a call from a client to buy shares in a company that the broker knows is a bad investment, is the broker obligated to tell the client? If so, is the broker "manipulating" the market? If the client knows something about the company that the broker does not, is the client "manipulating" the market?

I think people like the idea of a "rigged" market because it gives them someone to blame for their losses. It's funny that when the market is "booming" no one talks about the market being rigged. It's only when the market goes down that people start looking for a reason.

Would you complain if the price of something (like a tv, car or a house) went down? If you want to buy, you'd say "no". But if you just bought a tv, car or house, you'd say "yes".
 
 
Jan 27, 2014
Everybody who buys or sells on the market manipulates the price. I agree with Tonyo123 one hundred per cent when he says that simply because the market is manipulated does not mean it is rigged.

Yes, the stock market is necessary - but are futures/options/derivatives necessary? Probably not.
 
 
Jan 27, 2014
To disagree with some posters -- markets do create value. They provide the means for transactions. A strong financial sector is a requirement of any strong economy. Derivative markets were designed to spread risk and thus create value. They didn't do that, but legitimate markets that are understood by both buying and selling parties absolutely add value.
 
 
-1 Rank Up Rank Down
Jan 27, 2014
Over the long term, stock prices follow dividends (i.e., the fundamentals). They are not tied to earnings because you as an investor do not have direct access to the companies earnings, only its dividends. Case in point, the great dividend raid of 2012. Because Obama got elected, investors knew (or at least anticipated) that taxes on capital gains and dividends would be raised, and potentially by a lot. So, in anticipation of that event, companies opted to take money set aside for future dividends and pay out more before the end of the year. Consequently, stock prices also rose. As it turns out, the tax consequences were not as bad as anticipated, but it doesn't matter. People, quite rationally, act based upon the anticipated future, whether it pans out that way or not (e.g., stocking up for a snow storm). For the most part, the stock market is orderly in this fashion... until it is not. It's the signal and the noise. Unfortuneatly, we get a lot of noise in the stock market. But that noise has a lot to do with people anticipating actions by the Fed, or taxes, not so much by market manipulators (although, you could argue the gov. is the worst market manipulator).

Manipulations happen, but short term at best. People want their money now. High frequency trading can be seen as manipulation, but mostly, it amounts to skimming (e.g., tiny profits, done a gazillion times = big money). But, the major side-effect of this HFT is things like the flash-crashes.

@Melvin1
Even Warren Buffet sells, and himself guilty of market manipulation (although it was the silver market, not stock market).
 
 
+1 Rank Up Rank Down
Jan 27, 2014
@shirtbloke: If you can show you have zillions of followers, then you can charge companies more to advertise for them since it looks like you have more influence. Followers are like ratings; more eyeballs = more advertising dollars.
 
 
+2 Rank Up Rank Down
Jan 27, 2014
@CliffClaven: I'm sorry, but you're 90% mistaken.

The stock market is simply an auction of shares in publicly-trades companies, most of which DO create value - it's the basis for their approximately 10% long-run returns.

Currency markets and derivatives markets are indeed zero-sum and don't create value, but owning shares of companies is entirely different. You are correct that Day Traders are gamblers. They don't care about owning the company, but merely betting on it's short-term price fluctuations.

Warren Buffett, by contrast, advises to own great companies purchases at good prices "forever."
 
 
Jan 27, 2014
Just because there are people trying to manipulate it doesn't make it rigged. Yes, there are daily fluctuations that don't have a basis in fundamentals, but over time the stock market follows earnings.

Look at earnings and stock prices historically and you will see all the real crashes came when earnings could no longer support the valuation. Robert Shiller keeps up a great excel database of that information from the 1700's on if you want to investigate it yourself.

http://www.econ.yale.edu/~shiller/data.htm
 
 
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Jan 26, 2014
@Phantom ll

See previous blog; They = Robots.
 
 
+16 Rank Up Rank Down
Jan 25, 2014
I look at high frequency traders or anyone else "manipulating" the market like I do the idiot who sits next to me at the blackjack table, splits a pair of tens, wins both hands and causes me to bust because the card I should have drawn by all rights went to the idiot. It's annoying for that hand, but statistically what the other players do at the table won't effect me over time. Likewise, eventually a company's stock value has to be rooted in reality. (see: RIM, Kodak, Best Buy, JC Penney, etc...)

I don't doubt that there are forces that nudge the market from day to day, but unless you're a day trader I don't think it will be a determining factor over the long haul. Besides, which was better evidence of the market being fixed, a 3% drop over a few days or the 30% gains over the past year in the midst of a sluggish economy? From where I sit the Fed has done far more to "manipulate" the marker during the past 5 years then anyone else to ever hope to achieve.


 
 
Jan 25, 2014
Just three simple questions: who are 'they,' how are 'they' doing it, and how do 'they' avoid being caught?
 
 
Jan 25, 2014
For those interested who don't want to do an internet search about what I said earlier, I found this link very informative.

http://en.wikipedia.org/wiki/High-frequency_trading

An enlightening quote: "The joint report "portrayed a market so fragmented and fragile that a single large trade could send stocks into a sudden spiral," that a large mutual fund firm "chose to sell a big number of futures contracts using a computer program that essentially ended up wiping out available buyers in the market."

So, certainly, if the big ecosystem of EFT's is this susceptible to prodding then it is certainly possible to devise schemes to exploit and manipulate this behavior for gain - assuming there was a way to understand and predict that behavior. If there is a way to do that I wish someone would tell me because I'd really like to know. :/
 
 
Jan 25, 2014
I recall an article I read in the WSJ about how there is an arms race among trading firms to get the fastest connection to the market because being first, even by very tiny fractional amounts of a second, gives software bots who actually do most trading a huge advantage over the other bots. There were some other sneaky tricks this allows which permits software to find weaknesses by essentially testing how other bots react to a move - without actually doing the trade - and the winner in this arms race is the system that can get results fastest. So copper and fiber lines aren't fast enough anymore - and enter the era of direct line of site microwave transmitters to move this information.

The picture is of a house of cards propped up by software algorithms and this system has known flaws because it generates feedback loops - and from this you can get catastrophic failures. The trading systems are now able to prod how various pinpricks affect the other bots and the house of cards without actually doing it - but presumably they are programmed to act when this kind of prodding results in an advantage.

To me this sounds like manipulation - but it's machines doing it.

To what extent that is in play here, I don't know, but what I have read so far leads me to think this bubble is popping for other reasons and the market response is a rational response to actual events. But of course these days who knows? When the software bots cause a crash sometimes it takes weeks or months to understand how that happened - then they tweak the system so it can't happen that way again - and then inevitably it happens another way. It's like the proverbial dike where you put your finger in one hole to save Holland and then another hole opens and eventually you run out of fingers.

I think this system has become so complicated no one understands it any more and like the weather it is chaotic and irrational. I simply won't claim to understand it because I don't - not any more. And certainly manipulation is a possibility but my guess is it's not the most likely of all the possibilities. It can't be (and isn't) manipulation every time there's a big drop - and to my mind when the accusation is made every time that seems more conspiratorial than rational. But one of these days the law of averages says the people claiming there's manipulation will turn out to be right.

There is a way to find out who the manipulators are, though. Follow the money. See who comes out ahead.
 
 
+1 Rank Up Rank Down
Jan 24, 2014
Scott,

Agree with your contention that they are manipulated. Also agree with the second link about fake social media.

But disagree with the first link about growth hacking. The writer of the article sounds like a loser.

Success is not manipulation. That tone of being cleverer and smarter than the product does not help a salesman.

Each product has to be marketed according to its strengths. There cannot be a rule that every product has to be sold online.

For instance, a pharmaceutical product needs a salesman to physically meet the doctor and show him the product. If the product is really good, there is no need to make a deal with the doctors.

===

If the product is a book, like yours, I might go to the readers directly, instead of hoping they will hit amazon and search for ads online.

It sounds archaic, but it works. Paste posters, distribute pamphlets, use billboards etc outside restaurants and public places. Make sure the book is available within a few steps nearby. I have sold more copies on restaurant counters than in a regular bookshop.

I am sure online sales on amazon etc work in certain niche markets. But you have a global presence. Your books sell in Europe, Africa, Middle East and Asia. You cannot rely on one or two online outlets.

Just a thought.

===

On stock markets,

The uncertainty in the value of the index has shifted from actual performance of the products to the mood of the manipulators.

Those who know the manipulators may find it reliable and less risk. Those who do not know who is manipulating have to live with the indulgence or quit.

Money is merciless.

.
 
 
Jan 24, 2014
The stock market does not create value. So it's dependent on smaller and/or stupider investors pouring in money.

With impossibly fast trading capability, perfectly legal (or undetected) inside knowledge and other advantages, the big players can rake in millions from tiny daily fluctuations while pathetic "day traders" try to keep up on their PCs, armed with hot tips and news already stale by the time a fawning financial media feeds it to them.

It's not necessary to control or manipulate the market in a gross and obvious way, although hubris and greed will always make a few try. It's like a well-run casino, where carefully calculated odds assure the house takes a consistent profit no matter how individual gamblers win or lose.
 
 
Jan 24, 2014
For the stock market, I speculate that most of the rigging is baked into the various software bots that do programmed trading for large investors and institutions.

Scott, is that view close to reality, or is there another built-in means of large scale manipulation?
 
 
+4 Rank Up Rank Down
Jan 24, 2014
Wasn't the point made last time that manipulating the entire stock market would be nearly impossible?

Sure, it's fairly easy to buy social media popularity. It's also fairly easy to manipulate a penny stock (see Wolf of Wallstreet) except that the regulators make it more difficult now. But manipulating the trillions invested in entire markets? No.

If your rationale is that one can talk markets up or down, then consider that Alan Greenspan's "irrational exuberance" speech made the market go down -- for all of one day, and not very much. And he actually ran the Fed and could've affected interest rates.

So who then, can have much of an affect on markets if he couldn't?
 
 
Jan 24, 2014
I don't get it. Where's the huge profit in having a zillion fake followers?
 
 
 
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