Trading markets - manipulation 102
Posted: Thu Nov 04, 2010 10:32 am
Here's a new one that most don't recognize, that makes it harder to see through the "fog of battle". Normally you can count on the main two emotions driving everything and everyone -- greed and fear, both usually short term with a time constant that varies depending on the overall sentiment -- which is an important observation on its own. Systems that work well over a given time period tuned to today's nervousness don't work as well when the time constant is different, and one of the things you look for all the time is what that is right now. This severely limits but doesn't eliminate the usefulness of backtesting, beware.
But now I want to talk about another, fairly new kind of manipulation that goes on that is from left field compared to how it used to be, one that few of the books and old wisdom apply to.
Sovereign wealth funds.
These are big chunks of money that don't always get played like a normal trader or fund would do. Being managed by those more or less not accountable for actually making money in the short term, they play things a lot differently than most other players, and I have an excellent example (hope I can find the old plots that show this, it's very illuminating, for now I'll just go with what I remember from then).
China has one such fund, and they are smart and slick at this, and know how to win for China if not their fund.
Awhile back, during the last bubble, there was some talk that the two major iron ore miners supplying China would merge, BHP trying to buy Rio in this case. The offer made Rio's stock zoom to the sky, though even with that, they claimed the offer wasn't good enough. The point is, the merger of those two would gain something very nice for them -- the ability to more or less set ore prices in a near monopoly. For obvious reasons, their biggest customer didn't like this idea much at all. So they did something about it. They bought Rio stock, enough to drive the price out of reach for BHP, and get a seat on the board to prevent the merger. I saw this going on, and once Rio had peaked, got out, and closed my short on BHP, both at a profit; usually, when one company buys another, they experience a bit of down just after due to risks it won't work out as hoped, while the company to be bought zooms on the news before the deal can go all the way down.
Once the deal was killed, BHP resumed their normal course, and Rio went back down, so sad. China probably lost money in Rio. But China won -- they don't have someone setting prices on ore, which is of quite a lot more value to China as a whole than what they might have lost on that deal.
This kind of shenanigan is new to most of the old school -- someone making a large play without expecting to make money on it, or even caring. It messes up their way of thinking. Most of the old school can't or won't adjust their way of thinking until it really is hurting them not to, and their ability to rationalize that it's a one time anomaly is amazing, but hey, it's not.
Money in the mix that isn't accountable (in huge amounts) really is a case of "it's different this time", so it's important to pay attention and not use the old methods of analysis overmuch, or depend on backtesting that goes back before this started to be important.
Despite a little information asymmetry especially as regards HFT, the reality is that the average dude with an online account now has so much more information than before, we can ride these moves like never before, and the reasons to go with a broker who is "in the know" are no longer so compelling.
I feel this is one reason for the quick rise of ETF's -- really just another type of mutual fund in sheeps clothing. The people who run those get paid no matter what, and all those brokers need work, so that's where they went. Think about this the next time you see an advert for a broker or get one of those cold calls -- if they were as good at this as they always claim, why would they bother with you, and not instead just trade their own account till they were rich beyond the dreams of avarice? I mention this to those sorts, and often get a very satisfying "click" on the phone that way. Hah! The truth hurts.
There's another factor that the rise of ETF's creates, that most aren't more than dimly aware of, even most experts it seems (though again, I'm putting this word out on the big stock pro trader boards and they are catching on). One thing most ETFs supposedly give you is some diversification in a sector or market. But since people buying the ETF mean the ETF in turn has to buy the underlying assets, the presence of that much money doing that makes those assets correlated, ruining the diversity! In other words, it's self fulfilling but in a backwards direction!
This one is snaky, and I'll have some more words on it once I have a better take on how to play with it, but it's something to look out for. This might not be deliberate on their part, but it's big and it does have an effect on how you'd trade to do best, so it's worth looking into.
For me, I avoid most ETFs, simply because of the de-worse-ification. They are at their best when they let you get into a market that's otherwise hard to get into, else their fees and loads will nearly always cause you to not do as well as if you'd just picked the right things to trade on your own -- you earn, but get to keep, the fee in that case.
Oh, and by the way, BHP is at it again, trying to buy POT of all people, which is another China oriented play. POT went up about 50% on the news (no, I didn't catch that one, rats, 50% in one day! You don't have to do many of those to beat the crap out of the markets.), and has sat there for awhile, after being in the doldrums far below its peak in the boom, which it is still well below. I'd have to bet we'll see some action by China in there same as last time....
Here we do have an information problem, it's hard even with the good data feeds to see this sort of thing going on, it's not generally in the news, and big players don't telegraph their moves much -- when they do, look out, they are trying to accomplish something by letting you know that and it's probably not for your benefit.
But now I want to talk about another, fairly new kind of manipulation that goes on that is from left field compared to how it used to be, one that few of the books and old wisdom apply to.
Sovereign wealth funds.
These are big chunks of money that don't always get played like a normal trader or fund would do. Being managed by those more or less not accountable for actually making money in the short term, they play things a lot differently than most other players, and I have an excellent example (hope I can find the old plots that show this, it's very illuminating, for now I'll just go with what I remember from then).
China has one such fund, and they are smart and slick at this, and know how to win for China if not their fund.
Awhile back, during the last bubble, there was some talk that the two major iron ore miners supplying China would merge, BHP trying to buy Rio in this case. The offer made Rio's stock zoom to the sky, though even with that, they claimed the offer wasn't good enough. The point is, the merger of those two would gain something very nice for them -- the ability to more or less set ore prices in a near monopoly. For obvious reasons, their biggest customer didn't like this idea much at all. So they did something about it. They bought Rio stock, enough to drive the price out of reach for BHP, and get a seat on the board to prevent the merger. I saw this going on, and once Rio had peaked, got out, and closed my short on BHP, both at a profit; usually, when one company buys another, they experience a bit of down just after due to risks it won't work out as hoped, while the company to be bought zooms on the news before the deal can go all the way down.
Once the deal was killed, BHP resumed their normal course, and Rio went back down, so sad. China probably lost money in Rio. But China won -- they don't have someone setting prices on ore, which is of quite a lot more value to China as a whole than what they might have lost on that deal.
This kind of shenanigan is new to most of the old school -- someone making a large play without expecting to make money on it, or even caring. It messes up their way of thinking. Most of the old school can't or won't adjust their way of thinking until it really is hurting them not to, and their ability to rationalize that it's a one time anomaly is amazing, but hey, it's not.
Money in the mix that isn't accountable (in huge amounts) really is a case of "it's different this time", so it's important to pay attention and not use the old methods of analysis overmuch, or depend on backtesting that goes back before this started to be important.
Despite a little information asymmetry especially as regards HFT, the reality is that the average dude with an online account now has so much more information than before, we can ride these moves like never before, and the reasons to go with a broker who is "in the know" are no longer so compelling.
I feel this is one reason for the quick rise of ETF's -- really just another type of mutual fund in sheeps clothing. The people who run those get paid no matter what, and all those brokers need work, so that's where they went. Think about this the next time you see an advert for a broker or get one of those cold calls -- if they were as good at this as they always claim, why would they bother with you, and not instead just trade their own account till they were rich beyond the dreams of avarice? I mention this to those sorts, and often get a very satisfying "click" on the phone that way. Hah! The truth hurts.
There's another factor that the rise of ETF's creates, that most aren't more than dimly aware of, even most experts it seems (though again, I'm putting this word out on the big stock pro trader boards and they are catching on). One thing most ETFs supposedly give you is some diversification in a sector or market. But since people buying the ETF mean the ETF in turn has to buy the underlying assets, the presence of that much money doing that makes those assets correlated, ruining the diversity! In other words, it's self fulfilling but in a backwards direction!
This one is snaky, and I'll have some more words on it once I have a better take on how to play with it, but it's something to look out for. This might not be deliberate on their part, but it's big and it does have an effect on how you'd trade to do best, so it's worth looking into.
For me, I avoid most ETFs, simply because of the de-worse-ification. They are at their best when they let you get into a market that's otherwise hard to get into, else their fees and loads will nearly always cause you to not do as well as if you'd just picked the right things to trade on your own -- you earn, but get to keep, the fee in that case.
Oh, and by the way, BHP is at it again, trying to buy POT of all people, which is another China oriented play. POT went up about 50% on the news (no, I didn't catch that one, rats, 50% in one day! You don't have to do many of those to beat the crap out of the markets.), and has sat there for awhile, after being in the doldrums far below its peak in the boom, which it is still well below. I'd have to bet we'll see some action by China in there same as last time....
Here we do have an information problem, it's hard even with the good data feeds to see this sort of thing going on, it's not generally in the news, and big players don't telegraph their moves much -- when they do, look out, they are trying to accomplish something by letting you know that and it's probably not for your benefit.