You’ve probably heard the expression that when it comes to gambling “big money eats up little money.” An obvious example would be when a small player with $100 sits down at a poker game and goes up against, say, three other players with $100,000 each. The small player could be the smartest player in the world, but he will lose all to them in a matter of minutes. The others will simply make it too expensive for him to play. The ante alone will take his money.
There is nothing illegal in taking or losing money in such circumstances at an otherwise legal poker game. The caveat at play is this: “A fool and his money are soon parted.” Most of us are smart enough to stay away from such games where both winners and losers are known in advance.
But did you know that a similar game can take place in the stock market? And once again, the big winners are the really big players, while the losers are all others who go up against them. The winnings and the losings in these transactions, however, can amount to billions of dollars. And in this game you can get taken and not have a clue that the game was rigged. As you read the following account, pay close attention. It should be a real “eye opener.” The story is all true .
It was just 4 or 5 years ago when I discovered one of the biggest scams of all time unfolding right before my very eyes. The immensity of it nearly blew my mind.
I was seated in front of my computer while tracking the S&P 500 stock index in real time. This means that I was observing the composite transactions (all buys and sells) as they were occurring. It was fun and educational to watch the results of millions of dollars exchanging hands while the resultant price changes were being traced on my computer screen. Still, under ordinary circumstances, I would have watched this trace for no more than a minute or so. But for unknown reasons, on this day I watched a bit longer.
The composite price was falling in virtually a straight line. I watched and waited for a directional change. But it kept going down. And it kept falling. “Holy smoke,” I thought. “There must be some big news taking place for this to happen.” But a quick check of the news services showed nothing of note. “Perhaps there is a glitch in the computers that control the Big Board,” I thought. That reason also fizzled as nobody was reporting any such thing.
Suddenly, the price trend abruptly changed, and the index started a vertical climb. It had fallen for about 30 minutes losing nearly one percent of its value. Now it was recovering. My eyes were glued onto my screen. The index climbed and climbed to approximately its starting point. Then, almost as quickly, it reversed again and headed down again. By now I was dumbfounded. I stared in amazement as the index fell to the same low, then reversed a third time, and climbed back to its starting point. This time it leveled off.
What had happened was this: The S&P stock index consisting of 500 of the largest corporations in the world had simultaneously fallen by one percent, then they all gained back the same one percent, then lost it again, and gained it again—all in a matter of about two hours!
What I had observed was impossible in terms of how the markets are intended to work. It was impossible for millions of traders to have simultaneously all sold, then they all bought back those shares, then they sold them again, and then bought them back again—and all transactions must have occurred simultaneously and perfectly coordinated. There was no way this could have happened by chance factors! There was a much better chance that a monkey could take a seat at a typewriter and type the complete works of Shakespeare—without making a mistake—from memory!
I sat there dazed. Then slowly the answer came to me. “Holy Jupiter, and Holy Mars, and Holy cow shit!” The world had just been ripped off by the biggest players of them all—the hedge fund managers.
The top hedge fund boys had at least $100 billion to play with. That’s about the sum needed to manipulate this market in the way that had just taken place. They had to have all sold short at the same time, all bought back their shares at the same time, sold them again at the same time, and bought them back again at the same time. And it was all perfectly timed via programmed trading—and that was all done by computers. Wow! This was James Bond stuff, but this was real. I saw it happen.
I estimated that at least $4 billion dollars was lost and made as a result of this large “W” that was traced on my computer screen. The winners were the hedge fund managers, and the losers were all those on the other side of their transactions. It was the only possible explanation. “Holy shit balls!” This was collusion and market manipulation on the grandest scale. But could I prove it?
Not on my life. The market went down, and up, and down, and up—just like it does every day. The net result was no change, and therefore no reason for those who are paid to detect such things to suspect anything at all. The difference this time, however, was that it had to have been coordinated just as I have described. Six or seven hedge fund managers could have pulled it off. All they needed was to have made 3 transactions each, but each timed to occur at the same time. The rest was done by computers. Perhaps this was the biggest heist of all time.
The “how they did it” collusion between fund managers would make a great script for a movie. Your speculation as to how it went down is as good as mine. A few code names, a few throw away cell phones, calls made at different times and locations, cell phones at the bottom of the ocean, and the rest is history.
Well, let’s expand this scenario 7 or 8 times in one year. At $4 billion per occurrence, and with $100 billion of working capital, the hedge fund boys would have produced 30 percent returns on their clients’ money. And they would all have looked like geniuses because the markets did not give up those kinds of profits.
In a perfect world the Securities and Exchange Commission watch dogs would have caught them, arrested them, and helped to put them all behind bars for the rest of their lives while trying to distribute their ill-gotten gains back to all those they had fleeced.
But this is not a perfect world. The SEC didn’t know about it, they did not even suspect anything. I tried to contact them, but they sent me a standard email reply to “file my complaint using their online form.” Yeah, sure. I might also note that SEC officials are paid perhaps $200,000 per year, while hedge fund managers earn $100 million up to $4 billion per year. That leaves little doubt about who has the real clout in these markets,
What’s more, the hedge fund boys are still at it, they are still showing huge profits, they are the highest paid crooks on the planet, and the world is none the wiser.
All except you. And me.
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Note: The S&P500 total market value today is $15 trillion. One percent of that total is $150 billion dollars. In 2009 it was worth approximately one-half that total. Both amounts are huge even to Bill Gates or Warren Buffett.
A one percent change in this index is not that unusual, but 4 of them occurring in succession, and in about 2 hours, is unheard of and off-the-charts unusual.
Great article. I believe what you say. The game is rigged, just like with the casinos, the house always wins. When will people wake up and see this. Thanks for writing your article.
Good article. And they actually do meet on computers in afterhours trading decide how to manage these high frequency trades. Ny attorney general indicted and settled for 400,000 dollars. A pittance!
Reviewed by DM Yates
6/7/2014
I, who am never at a loss for words, can only say 'wow'.
A good article. There is a logical development in it that holds the reader to the end. You have a strength in this kind of writing that shines. Your note touched a nerve. An anecdote. My wife's father is in the Shriners. He was the Potentate in 1998. He is part of that small group of financiers (within the organization) who use the stock-market to raise the funds necessary to run the Shriners Children's Hospitals on the West Coast. These hospitals are free of charge to children in need. He's convinced a bubble-burst is coming, in the U.S. economy, that will change all the free-markets on the planet.
I suspected it all along, watching the daily fluctuations and hearing the talk of an "old boy network" of CEOs, bankers, and hedge fund operators. A 1% drop in the market is not significant enough to be picked up on anyone's, let alone the SEC's radar. But a few insiders with timed computer trades could easily pull it off, and probably do, all the time.
Recently, I heard about a scam that was caught where a group of insiders had a faster pipeline for trading than the general market, thereby beating other traders by milliseconds and reaping in huge profits as a result. I'm sure that billions is skimmed off the market every year by many computerized hacks that work.
My brother says he only invests in companies that give dividends and doesn't worry about the stock prices. It may be a good strategy… or not.
Me too, will share, Much things dont miss your sharp eye eh? rather you were lucky to catch them red handed!!The hedge fund boys are all too greedy and caught up in the swirl, I am sure there must be a crooked Indian money minded baniya amongst the lot... Jk
The Day the World Was Fleeced—Big Time
