How Market Manipulation Works
Updated
Ever find yourself agreeing with someone who complains about rampant market manipulation, even though you don't really know how it happens or where it comes from? If so, do not feel embarrassed; the person complaining about it probably doesn't know either.
The truth is that the practice is so blatant and routine these days that it hides in plain sight. That, or it has simply become a modern taboo among those in power because widespread exposure of it could pose as a significant risk to said power.
Either way, it has gotten so ridiculous lately that it needs to stop before it potentially damages the all-important trust dynamic that maintains the "free" system's status quo.
Thus, let us begin this enlightening discussion with identifying who the direct culprits are.
These would be just about every financial institution that operates in some form as a Market Maker (MM) of weekly equity options. Yes - even your friendly mainstream broker that you had assumed was rooting for your financial success. Basically, if you can purchase weekly put options from them, they are part of the problem.
While this seems absurd, let's just discuss how markets get manipulated before you dismiss the idea entirely.
Markets can get manipulated through any number of sketchy practices. Just refer to the FINRA website and you will find terms for such practices, as well as laws governing their misuse. (Like when crude oil futures reach real negative levels, lol). But, the most tangibly-felt form of manipulation occurs in the way that is depicted in the chart above: by preventing markets from breaking out in either direction, particularly on days when options are set to expire. Quadruple Witching days, for example, are named as such because of how "supernatural" price movements tend to be throughout their sessions. This is complete nonsense, of course, since they move according to how the culprits want them to move - within a pre-defined range that is designed to suck traders into false-breakouts only to close very near the daily opening-cross.
The process of such a corrupt practice is known as price-pinning and it is at the core of every inexplicable market observation that seems uncannily perfect - like when markets only reveal their true direction during the last singular minute of trading. Note the extreme volume abnormality underlying the last-minute candle of today's E-mini session for a perfect example of this.
Despite what is commonly accepted, it is actually the case that MMs are essentially omnipotent, insofar as they can, and do, directly determine the opening and closing prices of individual issues - even on smaller timeframes such as the hourly or 15-minute scales. On most trading days, it is even possible for them to control outcomes on entire indices because of how influential options have become in today's market environment. The really serious problem with this is that it causes markets to crash wildly leading to widespread loss of wealth and subsequent economic severities.
How does too much power in free market system lead to the system crashing? It is because MMs are human beings and are therefore prone to making emotionally-charged mistakes; like getting cocky during times of persistently scarce volatility.
What ends up happening is that on very rare occasions, even bigger market players (like managers of huge pension funds that can affect markets absolutely) decide to unwind their long-held pure-equity positions accumulated over several years in a discreet manner. All the while, greedy/overconfident MMs continue to sell extreme quantities of put options to the public, thinking that there is no possible way that they'd ever need to pay for them at expiration. They'd be correct about this 99.99% of the time, and so they fail to realize how dangerous of a situation their in and how stupid it is to blindly sell such large quantities of out-the-money puts on the open market. The selling is so violent at the point of realization that MMs have no choice but to sell everything at once - even if everyone else suffers from the resultant market crash.
At this point, you might be wondering how this rare scenario has anything to do with the prevalent practice of price-pinning.
It relates because what normally happens when MMs get ahead of themselves in terms of how many puts they short on an expiration day is that they end up offsetting their risk via the mass purchasing of call options as the expiration nears. The calls become cheap enough that the entire cost of this process of risk hedging is pennies when considering the profits generated from selling the much more expensive time-heavy puts to the public. It is also a much more practical way to cover, which is why markets rarely make significant moves (especially downward) on Fridays. The process of MMs selling out-of-the-money puts, which they knowingly perceive as riskless for an exorbitant premium only to turn around and use call options to prevent prices from moving for the rest of the day IS THE MANIPULATION.
To reiterate, what I am saying is that the common form of market manipulation that most people arbitrarily place their blame on is the weekly Market Making process of covering themselves every Friday (and sometimes Wednesdays and Mondays as well) that is the de facto Manipulation that I am trying to convey in the chart above.
The reason why this process should be acknowledged as an illegal manipulative practice, rather than just some existential side-effect that comes with ever-evolving complex market systems is because:
1) It is enabling large institutions to sell grossly mispriced derivatives en masse with no intention of realizing the equivalent risk
2) It is a literal form of manipulation, as per the definition of the word "manipulation"
3) Once understood, it becomes blatantly obvious that markets lack the freedom that has always been pre-supposed, which will eventually change the nature of our
market to something non-sensical, like the concept of equal-outcome investments (you cannot grow your wealth in a market that grows everyone else's wealth at the
same pace, since that is just pure inflation).
To finish this lesson, I will use the chart of yesterday's price/volume action of the S&P futures as an example of how the manipulation of price-pinning can be applied practically:
1) Start with the obvious outlier that is the selling volume incurred at 3:59 p.m. yesterday
2) What this represents is the true bearish sentiment that should have resulted in a panic-sell to close the week
3) The reason why this panic sell never occurred is because MMs had bought very cheap call options starting around noon
4) Specifically, as soon as MMs feared that sentiment had turned bearish enough to threaten their short-put liability, they started covering with calls
5) This can be seen in the upper half of the chart, on the second breakdown, which notched the LOD
6) We can rule out the possibility of a major support bounce because the LOD is simply not a major point of support even if near the 4500 level.
7) This can be corroborated by the lack of historical price action around such high levels of the S&P. To naturally prevent a breakdown of this nature would require a more
historically tested level of support, in my opinion
8) Manipulation resulting from too much leverage and greedy MMs created a very tiny snapshot of the wrongdoing, which is captured full-circle in the volume reading of the last minute of the session.
I hope I was able to present this entire idea in a sensible way. Manipulative practices are very hard to pinpoint, prove and define, which is partially why they can persist for months on end. On a personal note, I really hate this type of market environment because it sucks to trade and limits the possibility of what makes markets fun in the first place. Ironically, I am sort of doing the very kind of complaining that I made fun of in the opening paragraph - the only difference is that I am certain about what is causing my frustration.
-Pig-Police
ES1!
SPY
SPX
CURRENCYCOM:US500
DWCPF
The truth is that the practice is so blatant and routine these days that it hides in plain sight. That, or it has simply become a modern taboo among those in power because widespread exposure of it could pose as a significant risk to said power.
Either way, it has gotten so ridiculous lately that it needs to stop before it potentially damages the all-important trust dynamic that maintains the "free" system's status quo.
Thus, let us begin this enlightening discussion with identifying who the direct culprits are.
These would be just about every financial institution that operates in some form as a Market Maker (MM) of weekly equity options. Yes - even your friendly mainstream broker that you had assumed was rooting for your financial success. Basically, if you can purchase weekly put options from them, they are part of the problem.
While this seems absurd, let's just discuss how markets get manipulated before you dismiss the idea entirely.
Markets can get manipulated through any number of sketchy practices. Just refer to the FINRA website and you will find terms for such practices, as well as laws governing their misuse. (Like when crude oil futures reach real negative levels, lol). But, the most tangibly-felt form of manipulation occurs in the way that is depicted in the chart above: by preventing markets from breaking out in either direction, particularly on days when options are set to expire. Quadruple Witching days, for example, are named as such because of how "supernatural" price movements tend to be throughout their sessions. This is complete nonsense, of course, since they move according to how the culprits want them to move - within a pre-defined range that is designed to suck traders into false-breakouts only to close very near the daily opening-cross.
The process of such a corrupt practice is known as price-pinning and it is at the core of every inexplicable market observation that seems uncannily perfect - like when markets only reveal their true direction during the last singular minute of trading. Note the extreme volume abnormality underlying the last-minute candle of today's E-mini session for a perfect example of this.
Despite what is commonly accepted, it is actually the case that MMs are essentially omnipotent, insofar as they can, and do, directly determine the opening and closing prices of individual issues - even on smaller timeframes such as the hourly or 15-minute scales. On most trading days, it is even possible for them to control outcomes on entire indices because of how influential options have become in today's market environment. The really serious problem with this is that it causes markets to crash wildly leading to widespread loss of wealth and subsequent economic severities.
How does too much power in free market system lead to the system crashing? It is because MMs are human beings and are therefore prone to making emotionally-charged mistakes; like getting cocky during times of persistently scarce volatility.
What ends up happening is that on very rare occasions, even bigger market players (like managers of huge pension funds that can affect markets absolutely) decide to unwind their long-held pure-equity positions accumulated over several years in a discreet manner. All the while, greedy/overconfident MMs continue to sell extreme quantities of put options to the public, thinking that there is no possible way that they'd ever need to pay for them at expiration. They'd be correct about this 99.99% of the time, and so they fail to realize how dangerous of a situation their in and how stupid it is to blindly sell such large quantities of out-the-money puts on the open market. The selling is so violent at the point of realization that MMs have no choice but to sell everything at once - even if everyone else suffers from the resultant market crash.
At this point, you might be wondering how this rare scenario has anything to do with the prevalent practice of price-pinning.
It relates because what normally happens when MMs get ahead of themselves in terms of how many puts they short on an expiration day is that they end up offsetting their risk via the mass purchasing of call options as the expiration nears. The calls become cheap enough that the entire cost of this process of risk hedging is pennies when considering the profits generated from selling the much more expensive time-heavy puts to the public. It is also a much more practical way to cover, which is why markets rarely make significant moves (especially downward) on Fridays. The process of MMs selling out-of-the-money puts, which they knowingly perceive as riskless for an exorbitant premium only to turn around and use call options to prevent prices from moving for the rest of the day IS THE MANIPULATION.
To reiterate, what I am saying is that the common form of market manipulation that most people arbitrarily place their blame on is the weekly Market Making process of covering themselves every Friday (and sometimes Wednesdays and Mondays as well) that is the de facto Manipulation that I am trying to convey in the chart above.
The reason why this process should be acknowledged as an illegal manipulative practice, rather than just some existential side-effect that comes with ever-evolving complex market systems is because:
1) It is enabling large institutions to sell grossly mispriced derivatives en masse with no intention of realizing the equivalent risk
2) It is a literal form of manipulation, as per the definition of the word "manipulation"
3) Once understood, it becomes blatantly obvious that markets lack the freedom that has always been pre-supposed, which will eventually change the nature of our
market to something non-sensical, like the concept of equal-outcome investments (you cannot grow your wealth in a market that grows everyone else's wealth at the
same pace, since that is just pure inflation).
To finish this lesson, I will use the chart of yesterday's price/volume action of the S&P futures as an example of how the manipulation of price-pinning can be applied practically:
1) Start with the obvious outlier that is the selling volume incurred at 3:59 p.m. yesterday
2) What this represents is the true bearish sentiment that should have resulted in a panic-sell to close the week
3) The reason why this panic sell never occurred is because MMs had bought very cheap call options starting around noon
4) Specifically, as soon as MMs feared that sentiment had turned bearish enough to threaten their short-put liability, they started covering with calls
5) This can be seen in the upper half of the chart, on the second breakdown, which notched the LOD
6) We can rule out the possibility of a major support bounce because the LOD is simply not a major point of support even if near the 4500 level.
7) This can be corroborated by the lack of historical price action around such high levels of the S&P. To naturally prevent a breakdown of this nature would require a more
historically tested level of support, in my opinion
8) Manipulation resulting from too much leverage and greedy MMs created a very tiny snapshot of the wrongdoing, which is captured full-circle in the volume reading of the last minute of the session.
I hope I was able to present this entire idea in a sensible way. Manipulative practices are very hard to pinpoint, prove and define, which is partially why they can persist for months on end. On a personal note, I really hate this type of market environment because it sucks to trade and limits the possibility of what makes markets fun in the first place. Ironically, I am sort of doing the very kind of complaining that I made fun of in the opening paragraph - the only difference is that I am certain about what is causing my frustration.
-Pig-Police
ES1!SPYSPXCURRENCYCOM:US500
DWCPFNote
*Note: SPY maintains exactly 1% change from open so that MMs can close out a perfectly hedged gamma move.Markets will continue at 4:15 pm, when the index options market closes and the Wed contracts magically hit the max pain.
Hate this crap.
Trade active
It is a Tuesday and they are still able to keep it afloat with binary call options.. (must be binary options cause none other expire today at 4:15 pm).If there's so much leverage in options manipulation that they are so exposed to the extent that the binary options market is preventing a breakout, this market is in trouble.
It will crack and it is gonna be predictably flashy.
Trade active
Here's another thing confirming the outrageous levels of pinning these days:All the banking stocks that beat Q1 2022 estimates last week did so via their TRADING departments' abnormally high returns.
All the banking stocks that missed should hire sneakier traders or expand their sneaky trading departments.
Economic picture seems perfectly aligned with what the manipulation is alluding to in the idea above. Think it is time for another Wall Street protest or two.
Trade closed: target reached
Just wait til this one gets blamed on Russia.To summarize what just happened and to make sure you are certain that it isnt Russia, the MMs got cocky, sold wayyy too many puts today some big whales sold the equity in their faces and then the MMs surrendered by selling the boat into the close on a Friday - probably with some serious losses and not to mention a crash come Monday.
But, could also be Russia as well.
Note
Now this is interesting indeed. It seems that instead of puts, the MMs over sold calls for tomorrow, which is like 1000x as dangerous as doing the same for puts.Dangerous only for these firms' balance sheets, of course. Not dangerous for the general public or for the general health of markets.
This might get wild after hours.
Trade active
Wow, cant believe the market got a squeeze in successfully today. Hope the MMs either lost money today or have at least been humbled enough to not blatantly manipulate from here until the inevitable blow-off top high bar.
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