Interesting theory...
a) Buy shares long to move stock up.
b) Start shorting at the top.
c) Walk shares down by lowering the offer with shares to short (these are "boxed" by the long position.
d) Hit the stock on down market days or news days
e) Hit the bid hard at the close to break the chart.
All right, well let's just see what would happen if we tried that. For the sake of discussion we'll assume we are sufficiently large to move the market by ourselves, otherwise none of your steps would be even possible.
Okay, buy stock to move shares up. Simple enough, given our ground rules. To put numbers on this, let's say we buy enough to double a stock's price from $10 to $20. Now, by the law of supply and demand there are going to be more sellers at the higher prices than at the lower prices, so we'd be buying rather more shares between $15 and $20 than we would between $10 and $15. (I know this logic got turned totally on its head in the go-go days of the bubble, but that's a historical aberration.) So now let's say you're long big-time at an average of, say, $16 with the price at $20, sitting on a nice paper profit, if you can only take it.
So, on to step b, shorting at the top. Since you wouldn't be selling to yourself, obviously this means you're done buying. Again, in the bubble days, the retail investors might well have stepped in and provided your volume for you, but in 2002 when you stop buying it'll be impossible not to notice. Anybody who'd been riding your mo-mo will very quickly realize the game's up, and they'll be bailing right alongside you. Furthermore, since they'll be selling long shares, while you are going through the harder process of shorting, you'll basically have the lowest priority in getting filled. Before you know it the stock's crumbled back to $13 and you've barely shorted half of your long shares. Already you're in trouble.
Well, no matter, on to step c, unloading the long shares to "walk the bid down", as you say. Supposedly this involves getting the maximum price decreases while selling as few shares as possible. This would of course be a favored tactic of the Pstewped school of stock trading. So let's you successfully do this, walking it all the way down to $7, while getting rid of half of your long shares, thus leaving you flat. And we'll assume the market is so whipped by this point that no one is heeding the constant call to "buy the dip". This gives us clearance to move on to...
Step d, hit the stock on down market days. This of course represents the brilliant "sell into weakness" strategy, so as to get the minimum possible price for your long shares and thus maximize your losses. With luck, you might get as little as $5 for the shares you bought at an average of $16. Now we're cooking! Of course, as we've seen graphically with REFR, such sharp cracks down don't always break the stock, and if buyers can be brought in, or worse, the company can and does start buying back stock, you basically wind up creating the lows in the stock yourself, and so the stock starts rallying on you while you're net short.
As for step e, well, that's sort of a situational tactic which is pretty much a coin flip. If the next day is down for the market your little bit of paint taping might hold, and you might not lose money. If however, you wake up in the morning to find the market in a happy mood and the futures soaring, you can start adding up the losses right there.
So, all in all, a hedge fund employing such tactics could make a small fortune, but only if they started with a large one.
Now here's how to actually MAKE money:
a) Sell (or short) into manic buying
b) Buy (or cover) into panic selling
Really devious, huh? |
