How Elon Musk’s Investors Manipulate Their Stock Market Valuations via “Pumps”: Crimes?
– Every Time Bad News Comes Out About Tesla, per an 8 year analysis study, Tesla stock suddenly, and mysteriously, jumps up. Investigators find that it just Tesla investors faking the stock ratings by running “Flashboy” automated stock buybacks.
– Fraud charged. “A complete violation of the faith and trust that non-corrupt day traders place in the market” say Senate investigators
The Securities and Exchange Commission has admitted that it has no ability to enforce the main rule intended to prevent market manipulation when companies buy back their own stock, and has no intention to do so.
SEC Chair Mary Jo White made the acknowledgement in a response to Sen. Tammy Baldwin, D-Wisc., who queried the agency about stock buybacks. Baldwin is one of a growing number of politicians — including presidential candidates Hillary Clinton and Bernie Sanders — who are citing buybacks as an example of deliberate financial engineering that bolsters concentration of wealth and keeps working-class wages stagnant.
Stock buybacks are an increasingly common practice in which corporations take profits, and instead of investing in facilities, research and development, or boosting worker wages, buy shares of their own stock on the open market, thereby boosting demand and driving up its price. Companies bought back over half a trillion dollars’ worth of their own shares last year.
The practice creates short-term rewards for executives who are paid in stock and stock options, and benefit from an increased price. They also make corporate earnings look better by reducing outstanding shares and increasing the commonly reported ratio of earnings-per-share.
Prior to the Reagan era, executives avoided buybacks due to fears that they would be prosecuted for market manipulation. But under SEC Rule 10b-18, adopted in 1982, companies receive a “safe harbor” from market manipulation liability on stock buybacks if they adhere to four limitations: not engaging in buybacks at the beginning or end of the trading day, using a single broker for the trades, purchasing shares at the prevailing market price, and limiting the volume of buybacks to 25 percent of the average daily trading volume over the previous four weeks.
In White’s letter to Baldwin, dated July 13, she admits that the SEC doesn’t collect data that would let it know whether companies breach even these generous limits. “Performing data analyses for issuer stock repurchases presents significant challenges,” White writes, “because detailed trading data regarding repurchases is not currently available.”
Initially, Rule 10b-18 didn’t include any disclosure whatsoever on the part of companies. A 2004 revision requires companies to report monthly buyback totals at the end of each quarter, as part of their 10-Q SEC disclosures. But they do not have to disclose how much they repurchase on a particular day.
“The companies have that information, but the SEC doesn’t collect it,” said William Lazonick, a professor of economics at the University of Massachusetts at Lowell, who has done extensive research on buybacks, and who provided the White letter to The Intercept.
White writes in her letter that the rule is not really a rule at all. Baldwin’s “letter asks for a list of all investigations undertaken by the SEC into possible violations of Rule 10b-18,” White writes, but “because Rule 10b-18 is a voluntary safe harbor, issuers cannot violate this rule.”
“I wouldn’t have thought that she would put it that way, but she said it,” said Lazonick.
White is technically correct, but if the SEC paid any attention to when the corporations left the “safe harbor,” they could then investigate them for market manipulation.
In her agency’s defense, White listed a number of SEC enforcement actions against stock market manipulation, including “pump and dump” schemes, where a company makes false statements to boost its stock price. But none of the four cases White listed involved stock buybacks. In the three decades since Rule 10b-18 has been in effect, investigations into buybacks have been “exceedingly rare,” according to Lazonick.
Rule 10b-18 was shepherded through the SEC by former E.F. Hutton executive John Shad, when he served as SEC chairman. “Shad believed that if you put burdensome reporting requirements on companies it impedes the operation of the capital markets,” Lazonick said. “The rule was a license to manipulate the market.”
In a statement to The Intercept, Sen. Baldwin said, “While I am concerned that the SEC lacks the tools to properly evaluate this issue, I am also disappointed that the SEC’s official response does so little to even acknowledge the stock buyback phenomenon we are seeing in financial markets.”
Last year, companies spent $553 billion to repurchase outstanding shares, just short of the record $589.1 billion in 2007. Large companies like Apple, General Motors, McDonald’s, Pfizer, Microsoft and more have engaged in buybacks in recent years.
Returning profits to shareholders through buybacks and dividends accounted for 95 percent of all earnings in 2014. As a result, each additional dollar of corporate earnings now translates to under 10 cents of reinvestment, according to a study by J.W. Mason of the Roosevelt Institute.
Baldwin tried to attach an amendment to the appropriations bill for financial services agencies requiring the SEC to conduct a study on buybacks, including whether rules like 10b-18 encourage them. But the Republican majority blocked the amendment in the Senate Appropriations Committee on July 23.
In the presidential race, Bernie Sanders called attention to buybacks in anop-ed in the Boston Globe in June, stating, “We must demand an end to stock buybacks.” Hillary Clinton also highlighted the buyback issue in her critiqueof “quarterly capitalism,” vowing to increase disclosure by forcing companies to deliver information on their buybacks within one day.
Lazonick said he doesn’t believe Clinton’s plan goes far enough. “The practice is the problem,” he said, arguing instead for the repeal of Rule 10b-18 and an end to corporations repurchasing their own shares. “More disclosure might start a discussion about what manipulation is, but we’re way beyond that. Why not recognize that this is manipulation, and say this is something we shouldn’t allow?”
Read the letter here:
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Photo: Getty Images
The stock market is rigged.
When I started making that claim years ago — and provided solid evidence — people scoffed. Some called it a conspiracy theory, tinfoil hats and that sort of stuff. Most people just ignored me.
But that’s not happening anymore. The dirty secret is out.
With stock prices rushing far ahead of economic reality over the last six or so years, more experts in the financial markets are coming to the same conclusion — even if they don’t fully understand how it’s being rigged or the consequences.
Ed Yardeni, a longtime Wall Street guru who isn’t one of the clowns of the bunch, said flat out last week that the market was being propped up. “These markets are all rigged, and I don’t say that critically. I just say that factually,” he asserted on CNBC.
Yardeni’s claim is the most basic one: that the Federal Reserve won’t do anything that will upset Wall Street and, in fact, is doing all it can to help the stock market.
But there are other recent claims that come closer to the bull’s-eye, even if the archers don’t quite see what they are hitting.
The Wall Street Journal carried an intriguing story on March 11 about how the Bank of Japan was “aggressively purchasing stock funds.” (The Journal is owned by News Corp., the parent of The Post.)
“By directly underpinning the market, [Bank of Japan] officials have tried to encourage private investors to follow suit and put more money in stocks in the hope of stimulating the economy and increasing inflation,” read the report with a Tokyo dateline.
That’s called rigging the market for a higher purpose, or hoping people who can afford to invest in stocks will make lots of money and spend it. The benefits, Japan’s central bank believes, will then trickle down to the rest of the economy.
The Journal provided lots of details that I won’t get into here. But the paper also presumed that all these central bank stock purchases were being done on the Tokyo market and that only the shares of Japanese companies were being rigged.
That’s not necessarily the case. The Bank of Japan — and other central bankers around the world — could easily be purchasing shares of American companies to help out the US stock market.
And Japan could even be doing it with the blessing of Washington, which is afraid any direct intervention in equities on its part would be discovered by nosy people like me.
Last fall, we learned that one American exchange has made intervention in — rigging — foreign governments easier and cheaper to accomplish. In October, it emerged that CME Group, the Chicago exchange that trades options and commodities, had an incentive program under which foreign central banks could buy stock market derivatives like the Standard & Poor’s futures contracts at a discount.
As I’ve reported many times, S&P futures contracts are the vehicle of choice for rigging the market. They are a cheap and very powerful way to cause an artificial buying frenzy.
After the market’s sizeable drop on Wednesday — the Dow alone lost 292.60 points — be on the lookout today for aggressive S&P futures buying today. It could start in Asia or Europe, but it almost always occurs.
Foreign central banks, of course, really don’t need a discount to buy S&P futures contracts. That’s like billionaires clipping cents-off coupons. But what the CME’s discount tells us is that the Bank of Japan and other central banks are probably already customers.
So the rigging of US stock markets by foreign entities has likely been going on for some time.
Has the US ever directly rigged the stock market? I’m sure it has. The sloppiest attempt seems to have occurred in 2008 during the financial crisis, when Washington was sure our whole financial system was toppling.
Phone logs that I received showed numerous calls between Treasury secretary Hank Paulson and Wall Street banks — Goldman Sachs, in particular — that seemed to coincide nicely with stock market rallies.
Unlike the Bank of Japan, Washington would have been coy about rigging the stock market and probably would have used proxies. The New York Federal Reserve Bank, for instance, would wink and nod at its favorite banks, and trades that turn the stock market upward would suddenly be made.
There’s another kind of market rigging that is also going on. This is being done by companies themselves.
Since corporate profits and revenues aren’t growing enough to justify current high stock prices, companies have been aggressively buying back massive quantities of their own shares.
By doing this, companies reduce the number of their shares owned by the public. This accounting trick boosts the calculation of profit-per-shares because the numerator of the equation (earnings) remains the same while the denominator (outstanding shares) is reduced.
Okay, so the markets are rigged. Basically everyone now agrees on that. But should we care?
America was built on capitalism and free and fair markets. Today’s markets aren’t fair. In fact, they are unfair because they are putting lots of money into the pockets of a small number of Americans.
The bigger problem is this: If stock prices are artificially inflated, nobody can tell what a company is really worth. And banks are going to be hesitant to lend money to companies with fuzzy valuations.
U.S. stock markets are rigged, says author Michael Lewis
A Wall Street sign is pictured outside the New York Stock Exchange in New York, October 28, 2013.
NEW YORK The U.S. stock market is rigged in favor of high-speed electronic trading firms, which use their advantages to extract billions from investors, according to Michael Lewis, author of a new book on the topic, “Flash Boys: A Wall Street Revolt.”
High-frequency trading (HFT) is a practice carried out by many banks and proprietary trading firms using sophisticated computer programs to send gobs of orders into the market, executing a small portion of them when opportunities arise to capitalize on price imbalances, or to make markets. HFT makes up more than half of all U.S. trading volume.
The trading methods and technology that make HFT possible are all legal, and the stock exchanges HFT firms trade on are highly regulated. But Lewis said these firms are using their speed advantage to profit at the expense of other market participants to the tune of tens of billions of dollars.
“They are able to identify your desire to buy shares in Microsoft and buy them in front of you and sell them back to you at a higher price,” Lewis, whose book is available on Monday, said on the television program “60 Minutes” on Sunday.
“This speed advantage that the faster traders have is milliseconds, some of it is fractions of milliseconds,” said Lewis, whose books include “The Big Short” and “Moneyball.”
Those milliseconds can be valuable, making it possible to send around 10,000 orders in the blink of an eye.
Darting in and out of trades, HFT firms make just fractions of a penny per trade, but the sheer speed and volume of their trading activity allows those that are successful to make significant profits.
Proponents of HFT argue that the presence of such firms makes it easier for all market participants to find buyers and sellers for their trades, and that the speed at which HFT firms can detect and take advantage of pricing imbalances between different markets and assets leads to smaller bid-ask spreads.
But Brad Katsuyama, former head trader in New York for the Royal Bank of Canada and a major figure in Lewis’s book, said he was finding that when he would send a large stock order to the market, it would only be partially filled, and then he would have to pay a higher price for the rest of the order.
With the help of new hire Ronan Ryan, Katsuyama realized that his orders traveled along fiber optic lines and hit the closest exchange first, where high frequency traders would get a glimpse, and then use their speed advantage to beat him to the other 12 U.S. public exchanges and 45 private trading venues. HFT algorithms could then buy the shares Katsuyama wanted, and then sell them to him at a slightly higher price.
Katsuyama and Ryan created a system in which RBC would send its orders first to the exchange that was the furthest away, and last to the exchange that was closest, with the goal of arriving at all places nearly simultaneously, cutting out HFT.
“Essentially, our fill rates went to 100 percent. We couldn’t believe it when we actually figured it out,” Katsuyama told “60 Minutes.”
Katsuyama said he decided to start a new trading platform, called IEX, for the Investors’ Exchange, employing similar tactics to those he used at RBC.
“It almost felt like a sense of obligation to say we found a problem that is affecting millions and millions of people – people are blindly losing money they didn’t even know they were entitled to. It’s a hole in the bottom of the bucket,” he said.
IEX has attracted the investment of David Einhorn, the billionaire owner of hedge fund Greenlight Capital, and an endorsement from Goldman Sachs. The investors in IEX are fund companies and individuals, not banks.
“We are selling trust, we are selling transparency, and to think that trust is actually a differentiator in a service business, is actually a crazy thought, right?” said Katsuyama.
Earlier this month, New York state’s Attorney General Eric Schneiderman said he believes U.S. stock exchanges and other platforms provide HFT firms with unfair advantages.
Exchanges allow trading firms to place computer servers inside the exchange’s data centers so that the firms can see the data as soon as possible. The practice, called co-location, is regulated and available to anyone who wants to pay for it.
Schneiderman has begun meeting with the U.S. exchanges, which include IntercontinentalExchange Group’s New York Stock Exchange, Nasdaq OMX Group’s main bourse, and four platforms run by BATS Global Markets, on possible reforms, a source close to the situation told Reuters.
A ban on HFT is unlikely, as U.S. regulators would be loath to put policies in place that could lead to a less liquid market, Robert Greifeld, chief executive officer of Nasdaq, said on Thursday.
(Reporting by John McCrank; Editing by Diane Craft)