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#1 LaurieAG

LaurieAG

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Posted 29 November 2007 - 07:37 PM

I was thinking about the basic market manipulation tactics portrayed in James Clavelles book 'Noble House' and wondered if the methods could be varied/used on the international market. It's probably called something else but the current markets are so opaque (with hedge funds, private equity & CDO's etc) that regulators would have difficulty determining if this is hapenning, unless they follow the trail backwards to the real beneficiaries who fit the criteria of being capable to perform the play.

Over the past few months the global markets have been very choppy in the wake of the continuing sub-prime crisis while small ocurrences seem to be repeating in a way that could be a deliberate play because of the unlikelyness of the exactness and the repetition. These ocurrences are exact 1% (and 0.99) point jumps in national market indices.

I call this basic play 'Taipan Trading' in honour of the head of noble house and reflecting that taipans are one of the worlds most poisonous snakes that feed exclusively on mammals.

The basic play is a bet to win $X when a market index will be within a certain range at a certain time and then spend $X/y to make certain that the index is what you bet by buying or selling stocks to make it so.

When you look at the profit percentages of $X for different values of y you see that while the real risk is a gamble, if you can guarantee certainty, the risk of not making a huge profit is minimal.

y = 1 Profit = 0
y = 2 Profit = 50% X
y = 3 Profit = 67% X
y = 4 Profit = 75% X
y = 5 Profit = 80% X etc.

While it could be difficult to leverage stock in this manner without drawing attention to your play you could consolidate (large) daily cashflows (or equivalents) on a monthly basis to make X up to 30 x Z where Z is the daily cashflow (or other).

The main identifying factor for beneficiaries (and potential players) of this play are organisations and conglomerates (or even sovereign funds) who have a minimum of 2% market control (1 to play 1 to benefit). While there would be very few (and easily identified) beneficiaries who could use this play on the DOW JONES index there are many other smaller market indices that could fall prey to a much larger group (but just as easily identified) of potential beneficiaries.

All in all, this play could also be integrated with program trading to deliberately leverage the upside or downside intended although introducing leverage increases the risk of an overshoot or undershoot of the target. Alternatively, cleverly constructed program trades could be used to build up a distributed X stake without alerting the market watchers.

The good news is that just like a snake bite from a Taipan (now that the beneficiaries/type of snake can been identified, very few Taipan deaths occur these days when treatment is sought immediately after applying a pressure bandage) regulators can implement a treatment of antivenom to stop the effects of its poison on the mammals investing in global markets.