Thursday, August 16, 2012

Here's the post

The subject is market manipulation, it's here, it's been here since there was a market and it will always be here so best to understand it and make it work for you. I often remind members that above all, price is deceiving. Technical Analysis and the majority of retail traders who blindly follow it make it so easy for Institutional/Smart Money/Wall Street, etc to manipulate the market.

Jim Cramer of CNBC fame gave one of the most honest interviews I've ever seen from him and one of the most interesting views from the other side of the monitor. It was quite a while back on Wall Street Confidential with Aaron Task. I have featured the video here before, in fact, the last time this was the post...


And guess what, after searching for it, going to the bookmark I had, poof! The video is gone, I knew it would be because Cramer was a little too honest. Luckily someone thought the same and transcribed it on their site, here's the link, before going further, read this, especially the part about using options to manipulate the market.

I received an email today that was more of a comment than a question, it went like this (thanks for allowing me to share with the rest of the pack)...

"I follow a guy on Twitter who tracks unusual option activity. I meant to send you this yesterday afternoon when he posted the tweet below. Might explain some of today's action perhaps.
"Large Action in Financials ($XLF) with 80,000 September $16 calls and 165,000 October $16 calls"

Now, if you read Cramer's interview, he specifically says,

"A lot of times, when I was short at my hedge fund and I was positioned short, meaning I needed it down, I would create a level of activity beforehand that could drive the futures.  It doesn’t take much moneyOr if I were long and I would want to make things a little bit rosy, I would go in and take a bunch of stocks and make sure that they’re higher, maybe commit $5 million in capital to do it, and I could affect it."

"What you’re seeing now is maybe – it probably is a bigger market now – maybe you need $10 million capital and knock the stuff down.  But it’s a fun game and it’s a lucrative game.  You can move it up and then fade it.  That often creates a very negative feel.  So let’s say you take a longer-term view intraday and you say, “Listen, I’m gonna boost the futures, and then when the real sellers comes in, when the real market comes in they’re gonna knock it down and it’s gonna create a negative view.”
That’s a strategy very worth doing when you’re evaluating on a day-to-day basis.  I would encourage anyone who’s in a hedge fund to do it, because it’s legal."
    " By the way, no one else in the world would ever admit that, but I don’t care. And I’m not gonna say it on TV."

" I could get a stock like RIMM for maybe – that might cost me $15-$20 million annually to knock RIMM down.  But it would be fabulous because it would beleaguer all the moron longs who were also keying on Research in Motion."

When talking about how to knock AAPL down, after talking about spreading disinformation, Cramer talks about buying Puts, making it look like there's something negative someone knows reflected in that put buying, but it's really just to create an impression, it' a straw man position.
"By the way, ‘cause the stock at 84/85 - a little bit a capital you go buy some January 80 puts that makes it look like there’s gonna be something going on.  So maybe give Morgan an order to buy 1,000 Jan 80 puts, and then you go position limit with …maybe you use a hack firm that doesn’t know what the heck its doing – maybe you go to UBS for puts."

He continues...

"But what’s important when you’re in that hedge fund mode is to not do a thing remotely truthful, because the truth is so against your view that it’s important to create a new truth to develop a fiction.  The fiction is developed by almost anybody who’s down 2 percent, up 6 percent a year.  You can’t take any chances.  You can’t have the market up any more than it is if you’re up six, because starting Jan 2 you’ll have all your money come out."

You really have to read the entire interview to understand how this works.

So lets take a look at the positions in XLF put on in options considering the above...

Here's the September options chain for XLF, $16 Calls were $.04 yesterday or $4 a contract, at 80k contracts that's $320,000 

Not much of an investment for a $500 million dollar fund.

Here are the October Calls, the $16s were $.13 yesterday or $13 a contract. At 165k contracts, $2,145,000, not even close to the amount Cramer was talking about and he didn't have a big fund.

XLF saw accumulation at 8/2 like the rest of the market...

If we are VERY conservative (knowing most retail won't buy a day like that), lets assume half of the day's volume was accumulated, at 63,439,600 shares traded, and assuming again VERY conservatively that the average price was $14.50, we have a position almost $459,937,100 long.

With 26,883,400 shares of XLF traded today, let's assume that on the breakout over $15 and with that call position that seems very large yesterday, half of the accumulated shares were sold today at an average price of $15.05 and the other half were sold the previous 9 days at an average price of $14.90; 

We have 15,859,900 shares sold at an average $14.90 and 15,859,900 @ $15 on average today, that's 236,312,510 and 237,898,500 for $474,211,010 and a profit of $14,273,910. If it took an investment of  $2.1 million to finish clearing out that position, it's still a decent profit on a very small move. 

However it's never as easy as that, Wall Street uses off-setting hedges, short positions, derivative positions, sells at the highs, buys at the lows, they use much more sophisticated options strategies, I can almost guarantee those calls weren't the only trade made to make it look like something big was going on in financials.

The most important thing to remember comes from Cramer directly, "You never do a thing that is remotely truthful", you create a fiction. When Wall Street is buying and selling they are very quiet about it, they have to be now because there are HFT programs that just look for institutional orders to front-run and cost Wall Street a lot of money, so they certainly aren't going to go in the wide open and put on a big directional position like those calls without there being some deception to the whole game.

Lets revisit this soon and see how things worked out.

In any case, the post is worth reading just for the truth from Cramer, you won't get it often as he himself admits.



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