The regulators spot a company with out of control buying and no news to explain it, and ask management for an explanation. Management shrugs and says, ‘we have no idea.’ The mad buying continues until suddenly the stock dries up, reverses and we all move on, wiser for the experience.
That situation is played out every day on the Venture Exchange, where pennies turn into dimes and dimes turn into dollars before Joe Retail has a chance to figure out what’s going on.
Sometimes it’s just down to an uptick in the perception of an industry. Sometimes a retail player drops $80k from his or her RRSP into a market buy on a stock with low volatility and the price goes momentarily hog wild.
And sometimes the insiders know something is coming – something big, that will see a big price spike down the road, but has yet to be announced.
Largely, though, if you looked at historic data, you’d find some good old-fashioned market manipulation going on when a company, out of nowhere, runs like a gazelle for a few days before quickly dying.
It’s easy to make happen, if you have the dough up front, especially on a smaller exchange like the Venture. Simply find a company with a limited daily trading volume and not a lot of asks in place, and buy a chunk of shares per day. Not enough to cause anyone to notice, mind you, but slowly build up that stake until you’ve got a nice wedge and you’re still under the radar.
Then, when the asks are getting a little heady, with your last 10k, quickly eat up anything that’s left, at the beginning of the trading day, and watch the frenzy.
It’s like the old Twilight Zone episode, The Monsters are Due on Maple Street, where aliens turn off a few machines in a quiet leafy neighbourhood and watch the locals work themselves into a frenzy trying to guess why it happened.
Stock jumps 5-7%, holders start getting alerts that there’s action afoot, a couple more sell at further inflated figures and, lo and behold, you’re over 10% and now stops are being triggered, presenting more asks to be consumed and moving the price up 15 or 20%.
Now the long holders are getting excited. They think big news is coming, so they buy more stock, looking to capitalize because, let’s face it, most long holders have been waiting for big news for months and will jump on any old rope.
Daytraders follow suit because, don’t you know, no smoke without fire. Something’s coming! And even if it doesn’t, if the stock is volatile, gamblers will gamble.
While the market steps into quick-buying mode, the guys that started the run quietly move out of their stake, selling off at the top and moving out at a profit.
An example, you say? Well, okay.
On December 4, buyers of Verde Potash (
TSX:T.NPK,
Stock Forum) began what looks like the trading pattern laid out above. Here’s a company that hasn’t had much to trumpet for a while, not a lot of market share, not much volatility, tightly held share structure. In fact, if it were doing halfway decently, it’d be a stone cold buy.
Let’s be clear - I can’t tell you Verde was being manipulated over the last week (for sure), but I can say there wouldn’t be many folks who’d call you crazy for suggesting it as a possibility.
The hallmarks: No news. No income. They’re in a ‘rebuilding’ phase. Steady long term declines that have long holders dying inside. Nobody’s paying attention – at all.
Slowly growing volume on Dec 4 as a bunch of new bids are placed, small nudge in share price as the asks are snapped up steadily. Stock up, but not enough for anyone to worry.
Dec 5, more of the same, only now there’s an accelerated rise. Long holders are now getting fantasies that the wife will come back to them after all, and some sell up.
By Dec 6, the stock is up 50% and people who’ve never heard of the company before are now noticing, so trend buyers start getting into the game. A rapid rise, some profit-taking at the end of the day, and the stock is now 75% higher than it had been on the 4
th.
Now the regulators step in and, far from stemming the run, they actually add to it by asking the company if they know why this market craziness is happening. The company says it doesn’t have a clue and posts a news release saying as much.
Which is basically a red rag to the daytrader bulls. It’s a dog whistle that something weird is going on and the share price is going nuts. It’s gotten so crazy even the regulators have noticed!
Dec 7 comes and now the game is on. Daytraders are in, lots of volume, sentiment still thinks this thing is going up for reasons unknown and, for people who have watched their stake drop from $0.50 three months ago to $0.20 just before the market move, this is a good time to get some money back – but they won’t. Because, you know, “Top dollar! No whammies!”
This fuels the market on further up – even if some big players are now starting to dump stock.
That gold rush thinking moves the share price up to $0.69 at its daily peak, over 220% up from where it had been a few days earlier, before it settles back down to $0.62.
Will the madness continue Tuesday? Maybe. But the people who, in my conspiracy-fuelled mind, started the game off are likely already moved out of the stock. They’ve made major money and those of us who have joined in, gambling our hard-earned on the back of nothing more than an unexplained market shift, are likely to lose our dough – or at least a substantial part of it.
It wouldn’t take much for regulators to identify who started the ball rolling. Nor would it take much to set up a system that halts trade in a stock if the unexplained jumps hit a certain percentage. That would be the smart way to run a market if protecting investors was the main priority.
But it won’t happen.
First, if such a system were set up, daytraders would gripe that they’re being impeded from doing their thing.
Second, companies would object when their long-awaited spikes are stopped mid-upturn.
And third, it would increase the oversight levels of regulators to a place where they’d need to spend a lot more money on a lot more people, doing their thing.
So just how easy is it to start a run on a stock? It’s a lot easier than you’d think.
The chart below is Thermal Energy’s (
TSX:V.TMG,
Stock Forum) chart over the last six months. See that big spike up the middle?
That was me.
No, I wasn’t running some elaborate scam designed to bring the company to its knees, nor was I dumping a $100k RRSP into the firm. I simply, stupidly, bought $200 worth of stock one morning and my stubby mitts hit ‘submit’ on a ‘market’ purchase instead of a limit buy, on a morning when, just by happenstance, someone else had already take the low asks off the table.
Unbeknownst to me, there was a sizable gap up to the next level of asks – so instead of grabbing it at the $0.40 it had been sitting at forever, I got it at $0.054; An 18-month high.
Within minutes, long holders of the stock were selling up while others were noting the big jump and buying in, expecting big things. The Stockhouse Bullboards were full of long holders saying things like “Here we go!” and “At last, sixty cents, here we come!”
Not wanting to be seen as doing anything fishy, I sold my shares within minutes – again at market – and even made a small profit. Meanwhile, the price went up to $0.65 as the daytraders buzzed around like mosquitos.
Little old me, with my boneheaded trade, had caused a run on the company that was unlike anything their IR people, marketing people, sales news or long term company strategy had been able to manage for a year and a half previously.
Now, imagine the damage that can happen when someone with *more* than $200 in hand decides to engage in an ongoing campaign of market manipulation designed to make serious money. Imagine that they have boiler rooms helping the run, or high frequency trading programs, or messageboard touts.
To be clear, market manipulation sucks. And, realistically, it takes a lot to make a little. Before you decide to throw in your job at the insurance company so you can become a full time market thug, remember there’s a fine line between aggressive buying and selling and straight up market fraud.
But when you’re investing your heard-earned dollars and you see a pattern emerging, rather than thinking it’s going to triple, maybe take a step back and think about what might be – and likely is - going on.
Maybe Verde’s jump is innocent. Maybe it’s just a fluke. Maybe it’s undervalued and the market just got the memo. Maybe it’ll keep going to a dollar.
But I’ll bet you a $19.95 commission fee it opens lower Tuesday, and that no news emerges behind why it suddenly went nutty.
And, if news DOES emerge to justify that share bump, the question then becomes, why didn’t the company halt trading when it was clear big news had leaked to some but not all shareholders.