Ben Stein: Traders can manipulate the stock market any way they want

“I have come to believe in the theory of what I would call ‘financial realism,’ or what might more accurately be called ‘trader realism.’ Under this theory, on which I have an imaginary patent, traders can see masses of data any minute of any day. They can find data to support hitting the ‘buy’ button or the ‘sell’ button. They don’t act on the basis of what seems to them the real economic situation, but on what’s in it for them,” Ben Stein writes for The New York Times.

“Just as a tiny example, years ago a close friend, now deceased, was a trader in London for a big financial house,” Stein writes. “As he told it, one day I.B.M. came out with stellar numbers. The boss of the trading floor said, ‘O.K., the guy who’s getting the prize is the one who can make us money selling I.B.M. short.'”

Stein writes, “So the traders grabbed for their phones and started to put out any bad thoughts they could dream up about I.B.M. They called journalists, retailers, anyone. They sold huge amounts of I.B.M. short. Soon, they had I.B.M. on the run, made money on their shorts and went to Langan’s to drink champers.”

Stein writes, “As I see it, this is what traders do all day long — and especially what they’ve been doing since the subprime mess burst upon the scene. They have seized upon a fairly bad situation: a stunning number of defaults and foreclosures in the subprime arena, although just a small part of the total financial picture of the United States. They have then tried — with the collaboration of their advance guards in the press — to make it seem like a total catastrophe so they could make money on their short sales. They sense an opportunity to trick other traders and poor retail slobs like you and me, and they generate data and rumor to support their positions, and to make money.”

“More than that, they trade to support the way they want the market to go. If they are huge traders like some of the major hedge funds, they can sell massively and move the market downward, then suck in other traders who go short, and create a vacuum of fear that sucks down whatever they are selling,” Stein writes. “Note what is happening here: They are not figuring out which way the market will go. They are making the market go the direction they want.”

Full article here.

[Thanks to MacDailyNews Reader “Linux Guy And Mac Prodigal Son” for the heads up.]

MacDailyNews Take: Apple last week reported record revenue, record net quarterly profit, record Mac shipments, record iPod sales, and record iPhone sales. Apple’s revenue grew 35% year-over-year. Apple provided Q2 08 revenue guidance that’s a 29.3% increase over the company’s Q2 07 results. Apple’s share price has dropped approximately 35% in the past 25 days.

39 Comments

  1. I’ve always thought the whole mess of Wall Street (and other exchanges) were nothing but a bunch of cowardly weasels. This confirms it. The Ackroyd movie “Trading Places: had more truth in it than I like to believe. Screw ’em all – they’re screwing us!

  2. the article is basically correct.

    large trading houses of course “make the market”. creating waves of buying and selling. the only time trading houses make money is when they trade the stock. so market fluctuations are necessary to make money. creating the fluctuation and/or milking natural legitimate trends in a stock’s performance in order to exaggerate the fluctuation creates opportunities for buying and selling.

    legal? yes. ethical? maybe not.

  3. Of course, if traders can manipulate down, then that must also mean that they can manipulate up, right? Think about it: have we been in a bubble? Yes. Can we trust that a given stock’s value is good? Hardly. So many stocks have excessive valuations, at least if you look P/E. Traders can also drive up a stock to their advantage by talking it up, beyond what’s reasonable.
    Ben Stein is busy trying to save face here. In earlier NYT columns he claimed that the sub-prime crisis was overblown and wasn’t leading to a melt-down. Now he’s grasping for an explanation that allows him to keep claiming sub-prime is nothing. But it cuts both ways: we were in a bubble that went too far and was unsustainable because of manipulation and blind followers. Once the tide turns, traders chase the other way, and the crowds stampede in the other direction.

  4. Biz wrote, “However… they can NOT force you to sell, waiting it out should be an option. (unless you have more at risk in the market then you should).”

    That is exactly what I do with AAPL. Eventually, Apple’s performance in the real world has to be recognized by the stock market. At that point the bears get trampled by the stampeding bulls and then the former again play their manipulative games, but at new historic highs.

  5. Stien is right, but only to a limited degree. Anybody who tries to make money trading intra day on the market is being played for a fool – nobody can predict things here, and, indeed, wild rumours started by people with a conflict of interest can create swings.

    But these are short term, and tend to even themselves out – you need to look longer term. Plus, you need to recognize that things always get overdone, either too high or too low – protect yourself with stop orders.

    Finally, don’t argue with the market – if the fundamentals of the business are going well, AND the technical direction of the market for that stock is going well, go for it. Otherwise don’t – only one of the two isn’t good enough. Keep an eye on sector and general trends also.

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