Jump to content
Objectivism Online Forum

is it okay to be deceptive predator in stock markets?

Rate this topic


Trewesta Anamoly

Recommended Posts

I posted the following question to http://www.peikoff.com/ Q&A section.

I would like to hear from you guys too. so here is my question:

--------------------

Stock market and ethics:

Market makers hunt for stop loss orders shaking weak holders out from a profitable position. Big institutional investors often artificially mark up or mark down prices just before a big price move in opposite direction.

What do you think about the above behavior? If at all I make any profits, I think that's going to come from exploiting the above behavior, will that make me an immoral predator? How would an objectivistic trader behave in such a zero sum game with deception as one of the tactics!? Losers pay the winners in this game, does that justify deception of above type!?

-----------------

Thanks for reading this!

Link to comment
Share on other sites

Firstly, I think the prevalence of your examples in real life are limited. Moving a stock's price is easier said than done by any single player. And if one can put in the volume to move the market, doing so is a cost and it is not always clear that the outcome would be worth it. People have got burned doing things like this just as others have made profits. Of course there are some thinly traded markets and the examples could be relevant there.

Anyhow, assuming that one can do something like that in a particular market, I don't see why such actions would be immoral in any way, except when one has a fiduciary relationship with the other party. If one is someone else's legal agent or a fiduciary in some other way (as a company's manager might be with respect to their own shareholders), then it would be immoral to act in ways that violate that fiduciary relationship. On the other side, people ought to understand whether people they deal with are expected to act as their agents, or are actually free to compete against them. A salesman may appear to help you when he tells you all the great features that you would enjoy in the slightly more expensive model, but you ought to remind yourself that he is a competitor of sorts, and -- short of actual lies -- does not have many responsibilities toward you. Typically, in a stock market, you are dealing with third parties, and you can assume they are competent to contract. Also, they typically are not in a fiduciary relationship with you.

In this context, making use of any public information about bids or order-flow and acting accordingly is moral. You use the term "deception", but I question that usage. It is deception for a salesman to say "this car goes from 0 to 100 in 5 seconds" if it does not, but it is not deception for him to say "I can't sell this for anything more than $20,000". In the typical context, any buyer should see the latter as negotiation, and not an actual representation of a fact. More so in the stock market, where you are making no claim at all. For instance, if your technique involves buying to bid up a price, but your actual aim is to sell over the execution of your entire strategy, then no deception is involved. You are not making declarations of any kind when you buy or sell a stock. When you buy a stock from a third-party, you are not making a declaration that you think it is worth what you buy it for, or more than that or less than that. In fact, you are not even making a declaration that somewhere, somehow you are going to make a profit from the transaction; nor that somewhere, somehow this transaction is or is not part of some scheme that will earn you a profit.

In summary, while I'd question the "real life" profitability of your examples, if there really are situations where they can work, then making them work would be the moral thing to do.

Link to comment
Share on other sites

Hi softwareNerd,

Thanks for your inputs! I have couple of takeaways from your post.

  • I am not other traders' agent, so my actions have no obligation of any sorts to them, except for legal contractual obligations.
  • Marking up/down prices to sell/buy is a type of negotiation rather than misrepresentation of any actual fact !

you are right, corning a big liquid market for *longer period* is nearly impossible, but I think there are situations where a ring of big investors can collude to markup the price temporarily just to suck in the losers before the price takes a nose dive after few bars. Volume spread analysis deals with this subject matter.

When I said exploiting the behavior, I didn't mean to corner the market, but just to trade with 'smart money' once they have sucked in the herd at top/bottom by their artificial 'mark up/down' strategy.

Edited by Trewesta Anamoly
Link to comment
Share on other sites

When I said exploiting the behavior, I didn't mean to corner the market, but just to trade with 'smart money' once they have sucked in the herd at top/bottom by their artificial 'mark up/down' strategy.
Assuming no special conditions (e.g., fiduciary, competence to contract), the general rule should be to do what you think is smart.

It is the nature of the market that capital flow from those who act incorrectly to those who act correctly. In a free-market, this ought to mean that -- over time -- capital flows from those who are incompetent in their market actions to those who are competent.

Link to comment
Share on other sites

I posted the following question to http://www.peikoff.com/ Q&A section.

I would like to hear from you guys too. so here is my question:

--------------------

Stock market and ethics:

Market makers hunt for stop loss orders shaking weak holders out from a profitable position. Big institutional investors often artificially mark up or mark down prices just before a big price move in opposite direction.

What do you think about the above behavior? If at all I make any profits, I think that's going to come from exploiting the above behavior, will that make me an immoral predator? How would an objectivistic trader behave in such a zero sum game with deception as one of the tactics!? Losers pay the winners in this game, does that justify deception of above type!?

-----------------

Thanks for reading this!

Deception is lying to someone. Where is the deception in that? Who's being lied to, by whom, and by what specific means?

Link to comment
Share on other sites

Deception is lying to someone. Where is the deception in that? Who's being lied to, by whom, and by what specific means?

Lets say a trader figures out prices are going to fall and establishes a short position with a stoploss order to buy back

if price rises for some reason.

Market makers can see the traders (in reality thousands of such traders') stop loss entry and decides to artificially

mark up the price just to hit those stop loss orders, transferring their short positions to market makers !

Now our trader despite his best judgement closes with a loss and clearly its a trick by market makers !

Although there isn't explicit lying happening here but the results are exactly like the trader has been lied to through action instead of words ! I agree its the sole business of the trader to judge the actions of other competitors properly but still....

Link to comment
Share on other sites

Lets say a trader figures out prices are going to fall and establishes a short position with a stoploss order to buy back

if price rises for some reason.

Market makers can see the traders (in reality thousands of such traders') stop loss entry and decides to artificially

mark up the price just to hit those stop loss orders, transferring their short positions to market makers !

Ok, I get it now. If it can be done, that's a scam.

But I have a question before I make up my mind: How does one artificially mark up the price of a stock?

Link to comment
Share on other sites

Ok, I get it now. If it can be done, that's a scam.

But I have a question before I make up my mind: How does one artificially mark up the price of a stock?

Market makers can make markets on both bidding side and offering side and provide liquidity service to the market. So usually they will have a huge reserve of stocks for this purpose and also they have big clients to service for .

Flushing out buy orders with higher prices (i.e high enough to hit the stop loss) by big traders is very doable as the stop loss range for retail trader will be much narrower as retail trader can't withstand huge losses ! You can observe wide bars (i.e high low of bar is substantially wider) or small spikes (called 'tests') in chart...

Link to comment
Share on other sites

Market makers can make markets on both bidding side and offering side and provide liquidity service to the market. So usually they will have a huge reserve of stocks for this purpose and also they have big clients to service for .

Flushing out buy orders with higher prices (i.e high enough to hit the stop loss) by big traders is very doable as the stop loss range for retail trader will be much narrower as retail trader can't withstand huge losses ! You can observe wide bars (i.e high low of bar is substantially wider) or small spikes (called 'tests') in chart...

Well, if they're spending their clients' money to buy stocks above market value, that's theft. Their clients are being stolen from.

And if they're using their own money, then them making money is a mathematical impossibility, isn't it?

Edited by Nicky
Link to comment
Share on other sites

Oh Nicky,

no one would attempt to bankrupt themselves :) This practice handsomely benefits Market makers (MM), at the end of the day MM has essentially bought all the short positions way cheaper and is going to ride a steep fall of the price (as he has already seen a huge pending sell order in his order books!). So if they are trading for client or themselves... they are going to end with profits.

Link to comment
Share on other sites

Oh Nicky,

no one would attempt to bankrupt themselves :) This practice handsomely benefits Market makers (MM), at the end of the day MM has essentially bought all the short positions way cheaper

Let's say the stock was at price X when the traders initially sold it, and they set their stop loss at price Y. Just to clarifiy, three questions (using X and Y):

How much cheaper? How much was the price of the stock artificially raised? How much did that cost to do?

and is going to ride a steep fall of the price (as he has already seen a huge pending sell order in his order books!)

Be more explicit about the logical relationship between pending sell orders and the future price of a stock, please.

Edited by Nicky
Link to comment
Share on other sites

Three questions:

How much cheaper? How much was the price of the stock artificially raised? How much did that cost to do?

Be more explicit about the logical relationship between pending sell orders and the future price of a stock, please.

right... its cheaper by narrow stop loss range, but multiply the narrow range by big volume of traders, now we are talking about big sum of money ! Now consider price slides 20 times the narrow range, after hunting stop loss, MM should have substantial short positions grabbed from retail traders ! To mark up the price MM has to buy few shares to loss to shake out the retail traders usually with a thin volume and ends grabbing huge volume of short positions !

It seems you are not aware that MM or brokers can see all your orders through them, this means they can also see a huge block of sell orders gathering around certain price levels. Retail traders don't have any such special order book info (except for best 5 bids).

anyways little googling should help:

http://www.investopedia.com/terms/s/stophunting.asp

Link to comment
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
  • Recently Browsing   0 members

    • No registered users viewing this page.
×
×
  • Create New...