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Strategies & Market Trends : From the Trading Desk -- Ignore unavailable to you. Want to Upgrade?

To: Steven Bowen who wrote (2339)	1/19/1998 11:53:00 AM
From: Robert Graham	Respond to of 4969

Interesting theory of stock price manipulation by institutions. I have a couple thoughts on this topic. First, I think the "outsiders" (non-MM) ability to manipulate prices is essentially a zero sum game. In other words, the advantage you obtain can disappear quickly in time leaving the manipulator with the cost of the manipulation. As mentioned before, the cost in this case is either the locking in of an existing loss in their stock position, or the forgoing of future profit. The exception is if you manage to change the trader's perception of the stock where the trader would for instance buy instead of sell the stock. Now the Nasdaq MM is in a better position to manipulate the stock at little or no "cost" by how the MM processes the orders and handles their quotes on the stock. However, the more liquid the stock, the less the MM can generate a short term "advantage" over the trader except perhaps for the collusion efforts that I have heard about which can even over short periods of time generate them a nice amount of extra profits. This leads to me second consideration. I never heard of an individual or company willing to liquidate their position they have in a stock in order to protect their position in an option. I think there is a reason, for it usually works the other way around. The benefit of manipulating stock for a CALL option sold short is very short term, but the selling or purchase of the stock has more long term consequences. So the "cost" of selling shares is either to lock in a loss, or to forgoe future profits in the stock. This does not include their comission charges on the sale of the stock. I understand that institutions have become more shorter term in their thinking, but I do not think many have turned to this short term of a stance in the market. They simply cannot afford to do this. There is too much money at stake that needs to be managed for a consistent profit in the market. Unless they are a firm that obtains their money exclusively through their option transactions, their focus will be on their stock position in terms of either accumulating a position, maintaining a position, or selling their line of stock over a period of time. Also, in either case, their sale of stock would place them in a partial naked position with respect to the shorted CALL options. This sets up a different risk picture whcih I do not think institutions would normally be interested in pursuing. Now if their approach to profits also can work with their "manipulation" efforts, then perhaps the manipulation that you are proposing can work for them. So in this case the CALL options are written before the piece of stock is sold, they sell the 200,000 shares of stock, and then they purchase the calls back at a reduced price. But then this would be a planned sale of the stock which is different from what you have implied in your post. So in effect the shorted CALL options hedged their selling efforts in the stock. I would not consider this approach manipulation, but in reality a hedging effort. So what I am saying is that this price manipulation by institutions could only be afforded to be pursued by them in special cases. This special case is where the had intended to sell a piece of their position in the stock. However, a closer examination of this procedure would reveal that it is more a hedging effort on the part of the institution than an effort to directly benefit from the price manipulation of the stock. This would be useful with the more illiquid types of stocks. Now if the institution's primary focus is to generate income on their shorting of CALLs, perhaps they would consider selling stock. But then this assumes that they are selling the stock at break even or better, including commission costs. This leads me to my final concern which is that the sale of stock places the institution in a naked position in the option which is an entirely different type of approach to the markets as far as the risk picture is concerned. IMO becaue of this risk picture they expected to be able to render or maintain a CALL option "out of the money" for the duration until the end of the trading day. IMO this is still a risky approach because of the transient benefits of this approach which can quickly turn into the cost through the sale on more stock through an exersized option. And the volitile option expiration day would only add to these concerns. Still, if the institution planned to sell their position in the stock, this may not be a concern to them as long as they had the stock available to sell. For an institution that generates income through covered call writing, this approach may not be in their best interests unless they too could afford to have their stock called away. But then why sell their stock which they write covered calls in the first place unless their purpose was to divest themselves of their stock position. We get back to hedging efforts here. Any thoguhts? I amy be missing something here. What is interesting is that at least from what I can see, much that is thought to be "manipulation" actually the result directly or indirectly from hedging efforts of large money. The "indirect" component of this comes from the arbitration efforts that the hedging efforts of the big money can attract. This basically leaves the traders and MMs who would be able to take advantage of the short term manipulation stocks. Any thoughts on this? Bob Graham

To: Steven Bowen who wrote (2339)	1/19/1998 4:40:00 PM
From: Eddy Blinker	Respond to of 4969

Steve your example is ..................... one way in how to skin the cat indeed. What many always forget is that "they" are working together against us divided into groups of agents, lecturers and patronizers. All with their own agendas. Market Makers are doing exactly what their name implies and on top can virtually do it as they please. They can and do take away your and my money as it suits their fancy or the circumstance.Nobody gives a fiddlers fart. If trading around the "problem" as suggested on this thread is required to make a buck then the investor should be made aware in the glossy " Come on board brochure ". Just like the smoker is alerted before he opens his pack. ED

To: Steven Bowen who wrote (2339)	1/19/1998 7:11:00 PM
From: xstuckey	Read Replies (2) \| Respond to of 4969

" Or is it just a coincidense that so many of these stocks just seem to close an 1/8 below a major strike price?" Hi Steve, It has long been my thought that there is no manipulation, but natural market forces that cause stocks with heavy option open interest to close at the strike price. Using Intel as an example last Friday, if the price was above 75 (the nearest strike price with heavy open option interest) and you owned the 75,(or below) call options, you would have a "free" short sale in that you could cover the short by calling the stock if the position ran against you. This, of course, drives the price towards the strike ptice. Similarly, if you owned the 75 (or above) puts and the stock was below 75, you have a "free" long position in buying the stock. This, of course, drives the price towards the strike price. I believe this is how most stocks are pinned to strike prices on option expiration. Best Trading, X