Posted by Shyam Moondra
It appears that investment banks and hedge funds are involved in massive stock manipulation via short selling and options trading. It's ironic that SEC issued orders not to engage in "naked" short selling of 16 financial stocks, including those of many investment banks, but these investment banks are free to do the same thing to other stocks and manipulate their prices. The stock markets were originally created to assist companies with capital formation so that they could build new factories and hire more workers. The stock prices of individual companies moved up or down based on fundamentals. But now, because of the computerized short-term trading practices of big institutional players, the markets have become very volatile and risky places in the mode of casinos. These big players make money at the expense of unsuspecting small investors
Since SEC eliminated the "up-tick" rule for short-selling, these big players have been abusing the markets and are engaged in manipulation of stocks of smaller companies that are powerless to stop their stocks from being beaten down, even though their fundamentals are strong. Case in point, Terex (TEX), whose CEO has gone public saying that the company's outlook for the next two years is very good, and yet its stock has been brought down by short sellers from $95 in Dec'07 to $42 last week. These investment banks and hedge funds have so much money that by engaging in relentless short selling they can bring any stock down, whenever they wish.
The usual practice they deploy is that they first sell a stock short and bring it down before the options expiry date and then they start buying call options, and then they start covering the stock to bring the price up again. In the process, they may lose some money on short positions but they make proportionately much more money on options (because of leverage). They repeat this process for multiple stocks every month before the options expiry date. Some times they play the reverse game just to make options worthless and pocket the premiums they collected from other investors when they wrote the options. Time and time again, we see certain stocks behaving in a peculiar way before the options expiry date, from which it's obvious that they are being manipulated. The losers are, of course, small investors and small and medium-sized companies that are powerless against these enormously resourceful investment banks and hedge funds that can afford to throw, say, $20-25 millions at a stock and pretty much dictate in which direction the stock will move. I saw a YouTube video clip, featuring financial TV commentator Jim Cramer, in which he talked about how hedge funds manipulate the stock prices (the clip has since been removed by the owner Thestreet.com because of the copyright claim). Even Warren Buffet has talked about increased trading in derivatives and how it is damaging our financial markets.
These big institutional players often spread false rumors to move a particular stock in a particular direction. The SEC is currently investigating some investment banks and hedge funds, who shorted Bear Stearns stock, to determine if they spread false rumors about the health of Bear Stearns just to propel its stock price downward. If these investment banks and hedge funds can do what they did to a prominent institution such as Bear Stearns, it's so easy for them to bring down a helpless smaller company.
Another irony is that many of these investment banks now qualify to borrow money from the FED credit window and thus potentially use those resources to manipulate the stock prices. This raises the question why the government is helping big institutions with tax dollars to manipulate the markets and make money at the expense of small investors (i.e the tax payers)!
Under the lax enforcement by the SEC, the stock markets have become casinos where fundamentals don't matter any more. These trends are very damaging to our system because they directly affect the integrity of the markets. If corrective actions are not taken soon, these big institutional players may completely destroy our financial markets.
The Congress should hold hearings and have the CEOs of investment banks and hedge funds answer questions under oath about stock market manipulation. The Congress needs to do the following:
1. Put in place regulations over hedge funds to discourage illegal manipulation.
2. Ban short-selling by big players such as investment banks and hedge funds (such a ban already applies to mutual funds).
3. Limit trading in derivatives that often enable big institutional players to manipulate the financial markets and make money at the expense of individual investors.
4. Impose stiff penalties for manipulating financial markets, including jail term for the CEOs of companies engaged in such activities.
5. The SEC needs to do more in terms of investigating and enforcing laws against stock market manipulation. In recent years, they have been way too lax and the rules changes they made (e.g., eliminating the "up-tick" rule for short selling) have only made the situation worse.
