Stock Manipulation


Richard L. Peterson, PhD


            In recent years, it appears that the U.S. stock market has been subject to systematic manipulation in a generally upward direction. After the Oct. 19, 1987 market crash, caused in part by the influence of futures-related “portfolio hedging,” there was a sharp rebound on Oct. 20 that was futures related in the Major Market Futures pit and could have been orchestrated by governmental authorities and financial institutions with a vested stake in the market, albeit it the official interpretation is that the sharp rebound was the result of private profit seeking activities. However, subsequent to that crash, it was rumored that the regulatory authorities and major financial institutions had created a “Plunge Protection Team” (i.e., the PPT) whose task was to intervene in the stock market to prevent another crash from occurring.

            While the existence of the PPT has not been officially confirmed, a major Canadian Hedge fund has documented instances where they think the PPT has intervened in the markets. I am personally aware of two such instances.

            One instance of potential market manipulation I am aware of was when United Airlines declared bankruptcy in 1989 and the stock market fell sharply on a Friday. The next Monday, the stock market continued to fall sharply early in the day. Much of it was related to the selling of major companies whose stocks were contained in the Major Market Index, which modeled changes in the Dow Jones Average. At a Chicago Board of Trade Research seminar shortly thereafter, I talked with a local who had been in the Major Market Futures pit on that day. He said that the day started down sharply with extensive buying by major Wall Street brokerage firms in the deferred Major Market Index (MMI) contract early in the day after the market had fallen substantially. The locals took the other side of the purchases in that thin market and looked to hedge their short positions by buying near-term MMI futures contracts to form spread positions. However, before they could complete their hedges, brokers from the mega-Wall Street firms of “Goldman, Salomon, and Shearson” showed up in the pits with stacks of buy orders for MMI contracts. Consequently, the locals were caught net short and had to buy near-term MMI contracts in a panic. The Dow Jones average quickly went from down 80 to up 60 on the day. I believe the Wall Street Journal reported the next day who the brokerage firms were that engaged in the net futures buying that turned the market around.

            The second instance was when the Russian Premier, Gorbachev, was kidnapped, one day in August. It happened when U.S. Markets were closed, but world markets reacted sharply to the downside. One of my former students who ran successful mutual funds in Hong Kong, called me before our markets opened and asked how bad the crash was likely to be. At that time, the futures indicated that the Dow Jones Average would open down 200 points, or around 10%. However, shortly before the stock markets opened in the U.S., there was a furious rally in the U.S. Futures markets and the U.S. Stock market open was not down nearly as much and the net change on the day was not terrible. Shortly thereafter, a Federal Reserve Governor (I believe it was Robert Heller) gave a speech that was reported in the Seattle Post Intelligencer in September. In that speech, he said that the Fed could buy anything necessary to support the U.S. Financial system, which implied that the Fed felt free to buy futures, if necessary, and may well have done so on the day in question. I became aware of his speech because someone with whom I had contact through the Prodigy internet service had seen it and was nice enough to send me a copy of the Seattle Post Intelligencer article. That article was also referenced by the Canadian Hedge Fund that documented what it believed to be instances of PPT activity.

            Given what I know about the Federal Reserve (having formerly worked for the Board of Governors), U.S. Treasury operations, and the instances I cited above, I believe I know how the PPT was set up and structured. I believe it could draw funding, if necessary, from the U.S. Treasury's Exchange Stabilization Fund, which operates secretly with its market operations conducted by the Federal Reserve Bank of New York. In a pinch, based on the speech reported by the Seattle Post Intelligencer, it appears that the Federal Reserve could also contribute its own funds to support futures markets purchases required to stabilize financial markets, but it would probably have to report any futures holdings that remained on its balance sheet for any period of time, while the Treasury's Exchange Stabilization Fund is subject to less strict reporting requirements. The funds would be directed into the futures markets by the major investment banks (brokerage firms and the investment banking arms of major commercial banks) headquartered in New York, which are in constant contact with the Federal Reserve Bank of New York.

            I believe that after the 1987 crash, a coordinated approach was taken to potential interventions by the PPT. It would require that top authorities at each major participating institution be in close contact with each other and the Treasury so that quick market interventions could be arranged upon the Fed's signal.

            However, I also believe that once the communication scheme for the PPT was set up by the authorities, it could also be used by the major Wall Street financial institutions for their own purposes. In particular, by communicating among themselves, the major Wall Street firms would be able to participate in the stock market futures through coordinated actions that served their own ends but were not explicitly authorized by the U.S. Treasury or the Federal Reserve. Since the major Wall Street firms generally profit from rising stock prices, if they were to engage in such interventions, it would generally serve their interests to go beyond preventing plunges and orchestrate a pattern of rising stock prices. Such a pattern would be particularly useful in 2009 as most major Wall Street firms and banks have to sell stock to replenish their capital, and therefore, need to have stock prices rise so they can sell stock with less dilution and so the net long positions on their balance sheets will gain value and/or can be sold for a profit, thereby boosting their capital positions as well.

            Upward manipulation patterns that I have observed in the past seem to take several forms. First, given bad news, the manipulators may let the market sell off for a short while, then, having sucked in new short positions, they can turn the market quickly and make the shorts run to cover, often causing the market to rise, rather than fall, in the face of bad news—as happened after United Airlines declared bankruptcy. Such interventions need to be coordinated so that no major player continues to sell once the group has launched its buying programs. Second, major buying programs may occur as the market approaches major technical resistance points. If those points are penetrated, technical traders may cover shorts in a hurry and force the market to rise farther. The key is to have a large number of short positions in the market with stops that will be activated if the market rallies strongly. This may be one reason that markets “climb a wall of worry.” After penetrating resistance points, the market may fall back. However, if the manipulators want the market to rise, they won't let it fall too far. Thus, they may try to rally the market if it starts to fall below former “resistance” levels. This will cause the market to rise in somewhat of a stair step pattern—as first the market shoots up as shorts cover, then it sets back only partially to former resistance or support levels, and consolidates between the previous resistance levels (only penetrating them by amounts sufficient to bring in a new set of shorts) and the new highs. One clue that such stair step patterns may not be totally accidental is that Goldman Sachs's analyst, Abby Joseph Cohen, said early in 2009, in late March or April, that she expected the market to rise in a stair step pattern in 2009. She might well know since  Goldman Sachs appears to be a key Wall Street actor, is undoubtedly involved in any PPT activities, and can undoubtedly gain from a rising stock market.  A continuous rise in the stock market, however, requires that many excess funds be available in the economy, and that other investment opportunities, such as bonds, not be too attractive. In such a case, even relatively low corporate earning expectations may not deter people from investing in stocks. Thus, stair step patterns of rising stocks characterized the stock market during the Greenspan bubble years before the 2008-9 recession and derivatives entanglements generated the 2008-9 financial crash.



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