Market Manipulation by the 'Big Boys'?

I decided to dedicate some resources towards finding the reason why stock prices have diverged so far, and so fast from the underlying fundamentals. The preliminary results of my findings will be released over the next day or two, hopefully. In the meantime, enjoy this precursor.

Market volumes

Volumes in the markets are tapering down and are undermining the strength and sustainability of the recent rally. The average volume of both Dow Jones and S&P 500 in June were below their respective average volumes since Jan 2008.

As a matter of fact, you can easily and visually discern from the charts below that there is a clear inverse correlation between volume and index price. The higher the volume, the lower the index; the lower the volume, the higher the index. I attribute this to the observation that most real investors realize that there are too many headwinds in the market to truly commit significant long capital. Well, if that is the case, what is causing the stock prices to rise on light volume?

Growth in program trading

There has been a phenomenal surge in program trading over the past year with program trading accounting for 40.4% of total trading volumes on NYSE for week ended June 19, 2009 against 35.1% in January 2009 and 27.8% for the previous 52 weeks. The growth has been exceptional particularly since the last week of May 2009. This smells quite fishy, because the last week in May also saw a significant jump in both the S&P and DJIA on diminished volume. (Click chart to enlarge.)

Influence on market

Since April 6, 2009 when S&P 500 index was at 857 points, program trading accounted for 30.9% of total NYSE volumes. Over the past two months when the S&P 500 increased to 921 points, program trading has increased to 40.4%. Similarly, the relation between program trading and the S&P index was also witnessed during December, 2008 - February, 2009.

Increase in program trading historically has been a major contributor of increased volatility due to abrupt price changes caused by automated rule-based trading. Widespread use of program trading has been one of the causes for the stock market collapse on October 19, 1987, also referred as Black Monday. However, there are numerous other factors that could explain the increased volatility and it would be difficult to discern the sole impact of program trading on volatility.

Major Players

Goldman Sachs (GS) is the largest player in the program trading market space with nearly 20.6% of program trading volumes as of June 19, 2009. Overall, Goldman Sachs program trading volumes alone form a substantial 8.3% of NYSE total volumes, up from 7.0% since 2009 beginning. Although, Goldman Sachs trading volumes still dominate the program trading, there has been a significant surge in program trading volumes of Deutsche Bank (DB), Morgan Stanley (MS), Barclays (BCS) and Credit Suisse (CS) with 158%, 89%, 152% and 118% increases in program trading volumes. Deutsche Bank and Morgan Stanley‘s shares have increased to 12.3% and 11.6%, respectively for the week ended June 19, 2009 compared with 8.3% and 4.0%, respectively for the week ended January 2, 2009 suggesting that some of the recent rally could be driven by increased trading by these institutions.

NYSE Program Trading - 15 Most Active Members Firms (mn shares)	Total	Share of program trading volumes	% of total NYSE volumes (June Mid)	Share of program trading volumes (2009 beg)	Change
June 15-June 19, 2009
Goldman, Sachs & Co.	1,192	20.6%	8.3%	24.9%	-4.3%
Credit Suisse Securities (USA) LLC.	953	16.5%	6.7%	14.0%	2.5%
Morgan Stanley & Co. Inc.	712	12.3%	5.0%	8.3%	4.0%
Deutsche Bank Securities	667	11.6%	4.7%	4.0%	7.6%
Merrill Lynch, Pierce, Fenner, & Smith, Inc.	436	7.5%	3.1%	12.0%	-4.5%
Barclays Capital Inc	408	7.1%	2.9%	n/a	2.9%
RBC Capital Markets Corp.	310	5.4%	2.2%	6.6%	-1.3%
JP Morgan Securities	219	3.8%	1.5%	5.2%	-1.4%
BNP Paribas Brokerage Services Corp	214	3.7%	1.5%	1.4%	2.3%
Citigroup Global Markets	116	2.0%	0.8%	4.7%	-2.7%
UBS Securities, LLC.	96	1.7%	0.7%	2.9%	-1.2%
SIG Brokerage LP	92	1.6%	0.6%	1.4%	0.2%
Interactive Brokers LLC	72	1.2%	0.5%	n/a	0.5%
SG Americas Securities, LLC	49	0.9%	0.3%	1.2%	-0.4%
CIBC World Markets Corp.	42	0.7%	0.3%	n/a	0.3%
Total for 15 Member Firms	5,577	96.6%	39.1%
Total for All Firms Reporting	5,773	100.0%	40.4%

Goldman Sachs program trading	Program trading volumes	% of total NYSE volumes
Dec 29-Jan 2, 09	776	7.0%
Jan 5-Jan 9, 09	847	6.4%
Jan 12-Jan 16, 09	1,092	7.2%
Jan 20-Jan 23, 09	1,049	6.3%
Jan 26-Jan 30, 09	1,056	7.4%
Feb 2-Feb 6, 09	1,048	7.0%
Feb 9-Feb 13, 09	1,119	7.7%
Feb 17-Feb 20, 09	1,152	6.7%
Feb 23-Feb 27, 09	1,604	8.6%
Mar 2-Mar 6, 09	1,561	8.1%
Mar 9-Mar 13, 09	1,427	7.8%
Mar 16-Mar 20, 09	1,378	6.7%
Mar 23-Mar 27, 09	1,360	7.7%
Mar 30-Apr 3, 09	1,423	8.5%
Apr 6-Apr 10, 09	1,042	7.0%
Apr 13-Apr 17, 09	1,235	7.2%
Apr 20-Apr 24, 09	1,178	6.7%
Apr 27-May 1, 09	931	6.2%
May 4-May 8, 09	1,059	5.7%
May 11-May 15, 09	1,008	6.2%
May 18-May 22, 09	866	6.0%
May 26-May 29, 09	871	5.5%
June 1-June 5, 09	1,010	7.0%
June 8-June 12, 09	805	7.2%
June 15-June 19, 09	1,192	8.3%

Now, I have warned about Goldman's increased VaR and exposure to trading activities over a year ago (see "Goldman Sachs Snapshot: Risk vs. Reward vs. Reputations on the Street"). For those that believe Goldman is invincible in the trading markets, I strongly suggest you query their December 2008 trading performance, which resulted in a big loss. These results somehow became "orphaned", not being included in Q4-08 or Q1-09 results. This was a convenient exercise of "hide the sausage", since the December result would have skewed either quarter significantly to the negative.

Goldman is now basically a big hedge fund, and would (and should) be valued as such if not for the premium, "mystique" brand name that has been attached to it by those who do not adequately vet the financial statements. I will write more on this topic tomorrow. In the mean time, I suggest reading this article: "Who is the Newest Riskiest Bank on the Street?". I saw this coming a while back.

Maybe readers should send their local elected official a copy of "Newest Riskiest Bank" as well as this article to their fellow taxpayers and elected officials in Congress so everyone can see what our tax monies have been bailing out and supporting over the last year - the continued and blatant risk taking that was the root cause of this mess to begin with.

Pray tell, what happens if Goldman crashes in a programmed trading meltdown? More taxpayer TARP, bank bailouts, supports and guarantees. Now, what do you think happens if things go well for their trading program? The biggest bonuses in the history of the company, in order to "incentivize" stars to stay. This is absolute nonsense, and the risk-takers need to be the ones to bear the consequences of said risk, not simply be the sole persons and entities to benefit from the rewards of said risk.

I say the taxpayer should share in the Q1 Goldman bonuses, since it was the taxpayers support that kept Goldman alive through Q1 (remember the December loss, the expedited federal bank charter, the debt guarantees, the TARP, the ZIRP, the taking of junk assets as collateral, the TALF, the PPIP, the AIG bailout funds forwarded to GS, and the whole enchilada?). Does anyone really think that Goldman earned those bonuses without government assistance? Now, I feel I should keep my bonus, if I were to get one, but no one gave me $55 billion to keep me in business while I waded through risky mistakes until I found some that paid off! Can Goldman say the same?

Do not simply follow accounting earnings without taking into consideration the risk involved in generating said earnings. Consider yourself warned!

Full Disclosure: I have been, am currently, and may continue to be short and/or bearish on investment and commercial banks, including GS, MS, CS and DB.

Comments

[eatthis:]

Excellent report, right now CNN is doing a story on the value of Michael Jackson's glove now that he's gone and CNBC is doing some serious paid advertising disguised as financial news from a retreat in Aspen.

There was so much hype and outrage about "too big to fail" and yet in the aftermath of the bailouts, we have the largest firms getting even larger.

I think shorting GS is crazy, don't you know they rule the world... it's not the Free Masons.

Jul 01 05:10 PM

[ain't no fo...:]

Great article Reggie. And let's consider who was Treasury Secretary last year, and where he had worked immediately prior to taking the job, who it was who sat in the BIG chair in the room when Bear and LEH went down in flames, and MER was emasculated in the forced merger with BAC, and AIG was nationalized and given what may amount to $185 Billion (or MORE!) in government funds, $12 Billion of which curiously ended up in Goldman's bank account as a result of the CDS collateral payouts... coincidence? I think not.

By the way, enjoy those program trading stats you posted... if they came off the DPTR (Daily Program Trading Report) you'll be getting them for exactly one more week and then, as reported by Tyler Durden last night in Zero Hedge, c'est finis - The NYSE is canceling them. I'm sure its just more coincidence, that they aren't getting pressure from GS or its "sponsors" in the administration, but there goes another little piece of transparency into the wonderful of organized crime, Goldman style.

Here's the link:

zerohedge.blogspot.com...

You didn't mention JPM in the NYSE trading stats. Now, if you had mentioned JPM in regard to it probably being the single biggest gunner of SPX futures the past two months, namely the guys who produced all those last hour (or minute) miracle rallies, and the strange way the Dow/SPX ran up instantaneously every time there was a bad news item or statistic the past couple of months, then I'd say it was just more of that pesky coincidence that Jamie D. was in some of those very same rooms as Hank when Bear went down, and someone mercifully euthanized Countrywide, and I'm sure these guys didn't profit from any of the above collapses and bankruptcies, and I'm DEFINITELY ABSOLUTELY POSITIVELY sure that they aren't acting as proxies for the government by plowing huge sums of taxpayer $$ into stocks to keep the market's and peoples' HOPES high, because that would be their vig for the profits they obviously didn't get from said failures, and vig is, the last I heard, illegal.

Jul 01 10:11 PM

[John Lounsbury:]

Reggie - - -

Very timely article. I have a few thoughts to add:

1. If program trading is up to 40% of the volume and these "hedge fund/banks" are making big profits in a sideways market, where does that leave the mutual fund investors, the retail traders/investors, the pension funds, etc? How about losing?
2. I have reported elsewhere that volumes are very low on up days coming off dips, indicating weak buying interest.
3. Volume trend lines are down for the past two months, indicating investor apathy.
4. A number of price charts have pulled back to moving average lines recently penetrated with price going up. Failure to stay above these moving averages will be very bearish.

I think the next two weeks are crunch time and, Reggie, your opening statement, "why stock prices have diverged so far, and so fast from the underlying fundamentals" will be answered by 'they are now converging' as prices go down.

In a Real Money article a couple of weeks ago, I gave a better than 50% chance for the S&P 500 to pull back to the 770-800 region in the middle of the summer and a 25% chance of retesting the March 9 lows this fall. With the additinal developments since then, I think the odds have improved for these declines.

Keep up the good work. You look at data that I don't track, so I look forward to everything you put out.

Jul 02 11:44 AM

[Reggie Midd...:]

@ John,
thanks. Send me an email through my site when you get the chance. I would like to know more about what you do. You seem like a very bright guy!

Jul 09 05:50 PM