Are Our Markets Being Manipulated by 'Rogues' or Firms?

Everyone has heard of the Wikipedia but not everyone
knows about the Investopedia, a Forbes website, that monitors
finance for market players. One of the issues it is concerned
about is market manipulation, actions by rogue and not so rogue players
who, working alone or together, unduly influence the way our supposed
"free" markets function.

It is a fascinating source
of information for the uninitiated who hear the daily reports on the
ups and downs of the Dow and believe that somehow it is all part of
the natural order of the universe.

It isn't.

Thanks to an even more informative
web site, Gamingthemarket.com, we learn that in fact markets are subject
to, prone to, and characterized by all sorts of manipulative practices.
Here's one you may not have heard of.

"Ghosting: An illegal
practice whereby two or more market makers collectively attempt to influence
and change the price of a stock. Ghosting is used by corrupt companies
to affect stock prices so they can profit from the price movement.

This practice is illegal
because market makers are required by law to act in competition with
each other. It is known as 'ghosting' because, like a spectral
image or a ghost, this collusion among market makers is difficult to
detect. In developed markets, the consequences of ghosting can be severe." -Investopedia

It looks like we have gone
from the age of the trustbuster to the era of the ghost buster as fiction
once again turns into "faction."

Last week, the price of oil
mysteriously shot up. There were reports of yet another "rogue"
trader. The New York Times later reported:

"Reacting to recent
swings in oil prices, federal regulators said they were considering
limits on 'speculative' traders in markets for oil and other energy
products." Of course, the big banks and Wall Street firms are
expected to zealously oppose more oversight.

Some things don't change.
Anyone remember Nicholas Leeson, a one-man engine of speculation who
lost over a billion dollars and brought down his own bank before going
to jail? He later gloated on his website: "How
could one trader bring down the banking empire that had funded the Napoleonic
Wars?"

On July 4th, Bloomberg News
reported:

"Sergey Aleynikov, an ex-Goldman
Sachs computer programmer, was arrested July 3 after arriving at Liberty
International Airport in Newark, New Jersey, U.S. officials said. Aleynikov,
39, who has dual American and Russian citizenship, is charged in a criminal
complaint with stealing the trading software. At a court appearance
July 4 in Manhattan, Assistant U.S. Attorney Joseph Facciponti told
a federal judge that Aleynikov's alleged theft poses a risk to U.S.
markets. Aleynikov transferred the code, which is worth millions of
dollars, to a computer server in Germany, and others may have had access
to it, Facciponti said, adding that New York-based Goldman Sachs may
be harmed if the software is disseminated."

The next sentence is particularly
eye-opening:

"The bank has raised the possibility that there is
a danger that somebody who knew how to use this program could use it
to manipulate markets in unfair ways," Facciponti said.

J.S. Kim who runs an independent
investment research and wealth consultancy firm commented on the financial
site, Seeking Alpha:

"It's curious to note that
Goldman Sachs has admitted that it has developed trading software that
could be used to, in their own words, 'manipulate markets in unfair
ways,' yet nobody in the mainstream media has questioned whether Goldman
Sachs was / and is using its proprietary trading platform to manipulate
markets in unfair ways. Only extremely naive investors with zero understanding
of how global stock markets operate would deny that there has been continual
and excessive intervention into US stock markets to prop them up over
the past several months."

I spoke with Christian Angelich,
the founder or GamingtheMarket.com, a former airline pilot turned
trader, who told me that in recent years efforts to manipulate markets
have become pervasive and, yet, are mostly illegal.

He too cited Goldman when I
asked how it often works.

Without prodding, he came up
with one possible scenario involving a firm like Goldman Sachs that
had millions of shares of Intel it wanted to offload. So they issue
a report predicting it will sell for $50 a share. As a major player
at the New York exchange where they do 1 out of every ten shares, and
have become even more powerful now that competitors like Bear, Lehman
and others are out of business, their recommendations are given lots
of weight even though in this case they really want to just dump the
shares.

"None of this is new,"
he told me, "it's been going on for years. Even the founding Fathers
warned about it, but is more egregious today in part because of all
the technology these firms have." He says it is illegal and has been
winked at, citing one example: former Senator Phil Gramm attaching a
plan to kill the Glass-Steagall act as an amendment to a bill that then
sailed through the Congress while his wife was on the Commodity Futures
Trading Commission.

"We will only have a real
bottom," he believes, when the masses are out in the streets like
they are in parts of Europe. "For change, pressure from below is needed."

Sometimes unexpected events
can take over markets too, as Michael Jackson's untimely demise's
meteoric impact on the music market shows. His sales went from
nowhere to everywhere confirming one jaded pundit's cynical comment
that "he was more valuable dead than alive."

In making a new film on the
financial crisis as a crime story, I spoke with Moe Saceriby, a former
lawyer and VP of Standard and Poors who went on to become a UN Ambassador.
I knew him as a credible analyst of current affairs, an experienced
professional. We spoke on Wall Street.

He told me:

"I think we had a transition
from what truly was a free-market system to something now that is out
of control and probably what I would define as a predatory system where
we are not so much dealing anymore about the notion of fair prices,
and the notion of markets that -- that work transparently an open late
but in fact frequently markets that are manipulated for the end of maybe
a few out there -- a few investors, mega-investors. It's even -- even
that's very difficult to tell. "

This was new to me -- the whole
system being described as predatory, which smacks of criminal.

He went on:

"And these market movements
may not be necessarily reflective of the underlying value of that real
asset whether it be a commodity or whether it be in equity. What
I mean by that is frequently you see prices wildly fluctuating.
As an example: how could oil be at $147 in July of 2008 and all of a
sudden fall to below $40 a barrel at the end of that same year?
We all knew that in fact the whole economic system was in trouble over
a year ago. But the price of oil kept rising sharply. The
price of foods kept rising sharply."

Question: "Manipulated?"

Answer: "I think it was manipulated.
There is a lot of debate whether it's about speculation or manipulation
but there is an old expression among traders which is 'the trend is
your friend.' What that means is that in fact a few people can use
significant resources, financial resources, freely as a weapon."

Umm, weapons on Wall Street?
Already credit default swaps have been compared to financial hydrogen
bombs as financial terms merge with military language. Does anyone doubt
that these Wall Street manipulations have become form of warfare and
that, until now, the wrong side has been ahead.

Surely, all this demands a
serious investigation and serious regulation. Will it happen?