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The Case For Stock Market Manipulation

Some traders believe the stock market is manipulated. There are many references in social media to PPT (Plunge Protection Team), central banks and recently to the president himself in reference to market manipulation.

The truth is that most allegations of market manipulation come from traders with losing positions. No one complains of manipulation when positions are profitable. But lately there may have been indications of interference with the market that one could call manipulation attempts. These are basically sudden appearances of Fed officials when prices are under pressure and even tweets from the president himself praising the economy.

Here we make a case in favor of market manipulation based on a violation of a longer-term market dynamic. The case is weak because manipulation is nearly impossible to prove on such scale.

The dynamic we are talking about is the overnight impact on prices. We have talked about this dynamic numerous times in the blog.  For example, all the gains in SPY ETF since inception have come between the close of a day and the open of the next day, or what is known as the overnight effect.  This is shown in the chart below.

It is mind boggling when you realize that since SPY ETF inception, regular trading hours (RTH) have contributed a loss of $3.24 to price versus a gain of $265.19 due to the overnight effect. This asymmetry is staggering and maybe another inefficiency of financial markets. But what has been the cause of this asymmetry?

No one knows because no one can know the true reason. There are many theories, all non-falsifiable. The prevailing one is that this shocking asymmetry is the result of most news that affect the market developing outside RTH. But this is maybe a naive explanation. The asymmetry may be due to a combination of factors that have aligned: portfolio rebalancing, market on open orders, news before the market open, and many others.

As far as the link to manipulation, let us look at the overnight and RTH accumulations in SPY year-to-date:

Apparently, this year and contrary to longer-term behavior, RTH have contributed $32.93 to price while overnight has contributed only $8.04.

Although similar reversals have occurred in the past, it is peculiar that during a yea the market has been under pressure from trade wars, yield curve inversion (even partial) and recession forecasts, SPY ETF has managed to stay less than 5% below all-time highs mainly with help from RTH. This contradicts the fact that over the long-term activity during the day has resulted in losses.

The above realization is our weak case for market manipulation. In simpler words, market gains year-to-date are for most part due to verbal interventions during RTH. However, as we said already, there can be no proof of manipulation. In addition, manipulation usually cannot affect medium-term direction but it can be painful to traders.


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Charting and backtesting program: Amibroker

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