Plunge Protection Team? Pump and Dump?

Hi Mark,

Recently I have been seeing a lot of the classical pump and dump
scheme in RUT. The futures usually went much lower compared to previous
day's close, then RUT opens by gapping down, and then rising back up
again, usually to previous level. And all this happens with a lot of
rhetorical delusions on the news, like 'futures down on euro woes',
'stocks up amid whatever nonsense'.

So my question is, do you see this as a concern? My opinion is 'I
do'. I think the zig-zag behavior is hurting people with stop losses.
That means the guys with proper risk management will be toast.

On the
side note, do you believe this is the undoing of plunge protection team?

John

***

Plunge Protection is a giant topic all by itself. I have no proof it
really exists. But plenty of people are convinced. From Wikipedia:

"The Working Group on Financial Markets (colloquially the Plunge Protection Team) was created by executive order on March 18, by Ronald Reagan.

The Group was established explicitly in response to events in the
financial markets surrounding October 19, 1987to give recommendations for
legislative and private sector solutions for "enhancing the integrity,
efficiency, orderliness, and competitiveness of [United States]
financial markets and maintaining investor confidence".

"Plunge Protection Team" was originally the headline for an article
in The Washington Post on February 23, 1997,
and has since become a colloquial term used by some mainstream
publications to refer to the Working Group.
Initially, the term was used to express the opinion that the Working
Group was being used to prop up the markets during downturns."


In my heart, I believe the Obama administration wants to do the right thing.
However, I think in our horrible financial condition, there is just no
money available to support the markets. Thus, I don't believe the PP team would be doing much, if their mandate is to actively support the markets.


***

Pump and dump works for the stock of small companies. I don't see how
it can work for a gigantic index. Perhaps I am merely being naive.


***

I do believe, as you obviously do, that the stock markets are no longer a
safe place to invest. Trading is still viable.  But investing for a
decades-in-the-future retirement account: That's just a gamble.


I believe the quants have demonstrated the ability to take much of the
inefficiency out of the markets, and if they had not been over-leveraged
and greedy, they would still be doing so.

My point is that the
individual investor, as well as the professional money manager, has
virtually zero chance to win.

And the thieves still run the place. Allowing the banks to survive, and
now prosper with zero remorse and zero appreciation for being saved –
that's just too outrageous for words.


Sure investors can profit, but the game has changed. Careful research no
longer matters. Things we cannot comprehend rule the markets.  It's a
brave new world in which trading with open-ended risk (such as being
naked longs stocks) is unacceptable.

701




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6 Responses to Plunge Protection Team? Pump and Dump?

  1. Anthony V 05/27/2010 at 5:29 AM #

    Mark,
    Perhaps I am the naive one here, but couldn’t indexes be moved by the purchase and sale of index futures? If the Fed and or a “PPT” wanted to support or suppress an index they could simply buy or sell these futures. As a personal side note, my son (16 yrs old) wanted to learn about options so I gave him a copy of “Rookies” – he loved it and understood 90% of everything and vows to figure out the other 10%. Thanks for the common sense explanation of these tools.
    Anthony V

  2. jon 05/27/2010 at 7:25 AM #

    I disagree. There is nothing wrong with erratic movement. Stops do not make great risk management, low leverage does. If you have low leverage, then wild swings just dont matter. The stock market were never meant to be daytraded or whatever, but an investment vehicle. The problem lies mostly with the high frequency firms who are frontrunning, stealing trillions of pennies from investors, making billions in profits.

  3. Mark Wolfinger 05/27/2010 at 8:22 AM #

    Anthony,
    Yes, the purchase of indexes (in size) can move the markets. And the move can be substantial. The question remains (and I have zero clue as to the answer): can the government afford to take this secret action?
    I did not mean to suggest it wasn’t possible, when I said it couldn’t work for the big indexes. I meant that the term ‘pump and dump’ refers to spreading news/rumors on thinly traded issues, hoping to boost the price.
    ‘PUMP” is an important portion of the terminology, and does not mean ‘BUY’ and dump. Instead it refers to getting others to buy for you and then selling. So if one buys a humongous quantity to push the price higher – that is not really a pump and dump.
    Thanks for the comment.

  4. Mark Wolfinger 05/27/2010 at 8:28 AM #

    Jon,
    Naturally occurring erratic movement is probably healthy and excesses are removed from prices.
    I agree that low leverage is important and an intelligent idea. But ‘mom and pop investor’ understand nothing about leverage. They buy stocks, hold forever and expect to become adequately financed for retirement as the years pass.
    That plan is not viable, in my opinion.
    Day trading and HFT has taken over the markets, making it dangerous for individuals to play the game. Why we allow those pennies to be stolen is beyond me. Agree again that this was not the intent, but it has become the reality.
    Regards

  5. John 05/29/2010 at 5:13 AM #

    The so-called ‘pennies’ stolen are amounted to billions of dollar in profit by HFTs. That alone is a tell-tale sign something is wrong somewhere. I think mom and pop investors have been deluded about how the market actually works. There is no such thing as right or wrong price, because right or wrong depends on relativity. What HFT does is pushing this relativity to their favor in a grossly unfair manner, so unfair that it can be akin to stealing.

  6. Mark Wolfinger 05/29/2010 at 7:23 AM #

    In the financial markets, items that that pass for legal activities bothers me.
    John,
    a) Payment for order flow. That’s simple bribery and nothing else.
    b) High frequency trading is legal – unless it can be considered front-running. That’s what I would call it.
    The bottom line is that Wall Street owns Congress and the SEC is unwilling/unable to do anything about that.
    I agree that mom and pop investor have been sold a bill of goods. Very profitable for the brokers.