Fooled by RandomnessThere is a lot of talk about how this house is buying and that house is selling, size of orders, frequency, and timing. How the institutions and the big evil banks are manipulating the price and preying upon the poor ignorant retail investor. These house summaries in the data provided by the stock exchange is not proprietary trading, i.e., banks trading for their own account. It is the broker transacting the trade. So when you say it is BMO or RBC or the big evil empire, Goldman Sachs, it is not necessarily — and in almost all cases not — the house's prop traders trading the bank's own capital. The listing is the broker transacting the trade on behalf of the client, which could be a mutual fund, a pension fund, an index fund, an ETF, a portfolio manager, a market maker, an algorithmic trader, the issuer, any of you, or a little old lady with ten shares or a million shares.
And the notion that two operators trading between themselves could take a stock to zero, is totally erroneous. Because at some point they would be transacting so low that value buyers would step up and take the shares off their hands by bidding higher than the buying counterparty. And then they would lose their trading shares. It is the same on the way up, eventually value sellers would step up and stick the traders with more shares at a lower price than they are transacting, and such traders would have limited capital to absorb a flood of shares at a high price. Markets can be moved by big traders, or small traders in illiquid securities, but they cannot be manipulated for ever. Capital markets are too big and self-equilibrating to be controlled by anyone, no matter the depth of their pockets. An exception would be sovereign bonds, which are fairly strongly influenced by open market operations and financial institutional holdings which are a function of policy such as banking regulations. Treasuries are not a real market. But most financial markets are far more free the conspiracy theorists would suggest.
For example, the crazy gold and silver bugs. They go on endlessly about the paper markets and how JP Morgan is manipulating the market through derivative trades and shorts. But the paper market is irrelevant, because it represents neither real demand nor real supply. Today you can go out and buy physical gold for $1356/oz and silver for $16.70/oz, plus spread and commission, or sell for the same, minus spread and commission, so that is where the market is. There is no other price where bullion should be, because it is available now to transact at that price. Tomorrow is another matter. It is true to a certain extent that coordinated attacks at low-volume times can have long-term effect, but only in speculative markets. Selling in low volume and buying back in higher volume theoretically could be net-neutral to position but negative to price, and the reverse net-neutral to position and positive to price, but only if there is no supply-demand reaction, such as in a market for real goods of economic significance, or where valuation is easily measured. Gold bullion in a sense is an almost purely speculative market with no widely recognised objective measure of value, so yes, such an operation can influence price, and this is what Dmitri Speck's statistical analysis is all about. But some comments here are a bit like the shrill cries of the proponents of precious metals market manipulation. Yes, all markets have been manipulated, e.g., LIBOR (Barclays et al), crude oil (by the integrateds), treasuries (read Liar's Poker — great book, incidentally), silver (Hunt Brothers, CFTC, etc.) and on and on. But it is an exaggeration to suggest that there is a wizard behind the curtain at all times. Most trading is just arbitrary. People buy and sell at all times for all sorts of reasons, often for no good reason, or for no reason at all. Securities prices are a function of supply and demand, which is influenced by fundamentals, but also emotions individual and collective, internal market structure, and all sorts of patterns and theories charties trade on, and major macro fund flows, and just total randomness at any given time. Naseem Taleb has a wonderful expression: "fooled by randomness". And it seems to me every trader is subject to this phenomenon, and these are the causes of almost every post on message boards. Randomness and folly. (Include this one if you will.)
Also, there has been no end of speculation about the tax changes. But nobody pointed out that there was a 12% correction in the S&P 500, and that almost all markets are strongly correlated, including gold and gold equities, which people think are inversely correlated to other capital markets, but are not. All markets are positively correlated, the stock market (every stock market) went down about 12%, and mining stocks, with a beta of 2, being doubly as volatile, went down twice that, and exploration stocks, with a beta of 3, being trebly as volatile, went down thrice that. Hence the 36% correction from a little over 4 to 2 3/4. You can argue that fundamentals played some role, but as John Pierpont Morgan said, the market will fluctuate. There to serve all who wish to transact. Take it or leave it.