Market Manipulation?

Mortgage applications decline, unemployment continues to rise, consumer confidence comes back to reality, and yet the pundits point to the success of the stock market in the second quarter. There must be green shoots in the air.

Or, perhaps something else is going on. For the past several months, “high frequency” trading has been occurring. According to Bloomberg, machines have been trading with machines at a fever pitch in order to create the illusion of high volume, and drive market prices higher. Unfortunately, volume is not liquidity. Keep in mind that when the stock market collapsed in 2008 and early 2009, 40% of the natural “investors” went to the sidelines. Yet, the machines kept cranking out trades, giving the illusion that there were better things to come.

Where did the money come from? Consider this possible theory: The government bails out an insurance company, then the insurance company pays off the CDS (insurance) to a bank. The bank, which also accepted TARP funds (which it didn’t need), uses both the insurance money and the TARP funds in order to drive the stock market higher. Thus, sharp upward spikes in the major stock market indexes at the end of the trading day have become the norm. Factor in three or four more banks, (all funded by Uncle Sam), and you have a great recipe for manipulation. Of course, all of that is theoretical.

But what is not theory is that “high frequency” trading appears to be great on the upside. However, when the stock market goes down, and everyone heads for the exits at the same time, that’s when the folks at CNBC will say “What’s going on, how could the Dow Jones be down 1,000 points in one day?”

Just more conjecture.

Till next time,

Bill

P.S. – Next, the White Paper continues.


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