All right so just by venturing this premise I’m walking down the road of conspiracy theories, but it’s one of the basic things that traders need to get their heads around and assume about the market and will affect a trader’s entire philosophy and reactions to it. Are the markets manipulated? Is there really advantage in being the small guy or does being really big give the real advantage? So what do the people here think?
Paulson seems pretty big and he’s having a very tough year.
If the markets are being manipulated – who is benefitting?
Buffett? Soros? The Koch Brothers? Someone off radar?
No, given the history of LTCM and the periodic hedgie blow-ups,
I don’t think they are.
TRUE
Markets are manipulated in the micro:
early years the market was manipulated by “pool operators” that targeted shares for short selling
specialists would (and still) do raids on stops, forcing stop loss points to be hit, driving stocks down an few basis points as an avalanche of sells are triggered
today’s pump and dump schemes on low volume stocks
and more…
BUT
The market is pretty darn hard to manipulate in the macro:
The funds required would be huge
Past attempts are documented : hunt brothers cornering silver, but could not get out fast enough and lost everything
BUT
Hedge funds can pool their efforts - don’t beleive they don’t talk to each other at the bar downstairs after work - and target stocks/sectors as the old pools did.
SO WHAT
So short term traders will get rattled by the manipulation. But as Buffet says, the market is a short term voting machine and a long term weighing machine.
I think our ranking methods, along with some other features I’d like to see (ability to identify crowded factors - see old post on Quantcentration; relative strength - see request to be able to treat sims as tickers and to run sims on sim equity curves), along with macro will work good enough despite the “slippage” that the manipulators extract.
If I knew how to be a good manipulator (“legal manipulation” such as find stop points, sell into them, then buy back - I suspect this is why the one day mean reversion sims work) I probably would join them. The market is as much a head game as a forecasting game.
My own experience has led me to think along the lines of crakes. Who is benefitting? Who are the 75% of the market (according to Bloomberg) that engage in high speed trading? I’ve seen too many occurrences where a small stock (even if trading near a million shares) has unbelievable price movement that cannot be explained logically (uniform angle, 90 degree turns, active trading suddenly turning quiescent after a trade entry, 20-fold increase followed by cratering) in any way that I can see except that it is being jerked around.
Hi Sterling,
Yes, I think there’s some manipulation going on at different levels. The government bond and forex markets clearly are manipulated by central banks, and I think that feeds through to equities to some extent. For example, I doubt whether the rally up from March 2009 would have been anything like as large without QE going on. I don’t think any investor can completely ignore the macro issues, which is a bit of a problem if you’re trading mechanically.
I suspect there’s lower level manipulation going on as well by hedge funds and investment banks, but I think the small investor doesn’t really have to care about that too much as long as he isn’t over-leveraged. He can just sit it out instead.
regards,
Dodge
I’ve just finished reading THE QUANTS by Scott Patterson and the hedge funds were definitely not manipulating the market during the 2007/2008 crash. It was the other way around.
It is very interesting that there is a thread on here discussing what was happening during this period and I think Olikea concluded that there must have been a mass unwinding of positions which turned factor models on their head. This book, with interviews of some of the people and funds involved, confirms this. They were forced to sell due to a number of reasons(leverage being one) - hardly manipulating the market.
I agree with Dodge that the type of manipulation that may be happening would not greatly affect the smaller investor. You may well be trading a model that is somewhat similar to a quant fund, but you can be nimble. You can buy or sell your whole position without affecting the market and trade without leverage.
PS The book is really worth a read.
For the larger more liquid stocks that attract considerable attention and the interest of investors, I think there is less manipulation of concern. But I’ve been examining some of the more aggressive strategies likely favored by traders dealing with stocks more on the periphery and I get the feeling there is scope for manipulation. If in the general market more than 50% of trades are made by high speed traders as is commonly reported then it stands to reason that there are some areas where they make up significantly more possibly upwards of 90% of trades.
Now in a situation where 90% of trades can be accounted for by a single high speed trader things become interesting. It becomes significantly easier to identify other regular human participants and their positions—and trade against them. It would be like fishermen corralling minnows with their nets. If they know your purchase price and position size, with their deep pockets they can make you cry uncle if as likely you are a trader with a stop loss. One can come up with objections to this scenario but I think it is also possible to come up with answers that address those objections that uphold the ramifications.
Okay so after a couple of years I have confirmation of my suspicion and a detailed explanation from Michael Lewis. Took them long enough to make it public.
I don’t think this is a “true or false” thing, clearly some manipulation is likely to be going on - the question is how much.
Traders often blame poor performance on “manipulation” - I think this is much more likely to be attribution bias. It takes guts to admit your mistakes.
Not enough to matter to me.
Michael Lewis on 60 minutes last night said that these high frequency “manipulators” are stealing 1 cent of less from my trades. One cent? I am worried about 10 cents or more slippage on low liquidity stocks. Besides, they can’t trade enough shares of those stocks to make it worth their while. On my large cap trades I usually get a 1 or 2 cent difference between bid & ask anyway, so if they are affecting those it must be less than 1 cent. I don’t trade sims that don’t show averages of 10% or more per trade so 2 cents round trip is noise. My only concern is their affect on my stop loss fills during the next flash crash. That could be a disaster.
Denny 
I thought they said the high frequency targets big blocks. What I didn’t agree is that they called it “legal”. It is front-running, period.
It adds volatility but I doubt it has any effect on self-directed investors since orders are too small (but it’s another reason to stay clear of mkt order).
With the upcoming auto-trading we will be able to do some trickery of our own and create our own algos. For example we could send a limit order for {ask - 0.02} . After 20 minutes we cancel that order and send one for { ask - 0.05 }. After 15 min we cancel that one and send one for {ask - 0.02}. Repeat until filled. In other words by using limit prices we don’t get bothered by front-runners, and by not chasing the ask price we fool algos looking for impatient traders.
PS> these are just some thoughts… i have zero experience trading with such sophistication
It is front running, but the argument is that they are simply doing what market makers have been doing forever, they are just more efficient. I guess what I didn’t like was the Flash crash and its resolution. It was clearly caused by HFT but the resolution was that trades below a certain price drop were cancelled. There was an investigation but the results were not open to the public (that I am aware of) and there was no ability to sue the exchange. It seems to me they were protecting the high frequency traders with no consideration for the little guy.
As for market trading, the amount being skimmed is small (immaterial). Limit orders are at the bottom of the priority list - market orders are serviced first. I’ve had issues with very high liquidity stocks not being filled with a limit order for a significant length of time. Some even missed because they took too long.
I was just looking at some stock charts that had a surge just after the opening. The algorithm you are proposing would probably get a fill at the highest price. The chart below has 2 minute bars. This chart might be considered typical for stocks that have a strong change in reported fundamentals on the weekend.
Steve
Steve, while there is much legitimate discussion about the effects of HFTs, limit orders that do not get filled are your broker’s fault. It means that your broker did not send out your order to every exchange but tried to either route it internally with one of their own customers or even the brokerage themselves (which costs them nothing) or tried to route it to a exchange that charges them less–even if the best bid on that exchange is a little higher. (Most stocks actually trade hands over many different exchanges including the primary listing exchange and ECNs.)
Having a model hold up out of sample with reasonable prices for entry/exits is much more confidence building than reporting any kind of performance that is attainable only by few. STS @ 7.40 actually sounds just about right. It’s right in the middle of the post-open flurry. I would even say 7.5 is more fair.
While 7.09 - 7.16 is probably doable (for 2min!) , will it be so with 10x the subs? or 100x the subs ? with all subs putting market open orders? I’m even more convinced now that open prices have no business with fundamental P123 , weekly strategies in R2G.
PS: I’m assuming you were making a case against open prices 
Marco,
But if we had daily ranking, then you have 5 trading days to buy at the open.