QUESTION:
Marty;
How effective are Wash Trades in manipulating markets? There are people now suggesting that gold has been suppressed because of wash trades. Isn’t this just another excuse admitting they will not look at anything but gold?
Thanks
LW
ANSWER: Wash trades are not capable of manipulation beyond very short-term events. This is largely just another exaggeration, for in trading sometimes you simply have to play poker to get off a trade. This is because of the practice of front running. When I had to hedge Aristotle Onassis’ platinum positions, it was a nightmare because everyone knows the size of your position. This common knowledge makes it extremely difficult to trade. If you try to sell one ounce, they jump in front of you assuming the whole stockpile is coming. Hence, I would have to buy gold and then silver in small quantities, and then go in for a quote of platinum and sell. They saw I bought the other two and PRESUME I am a buyer. They immediately move the spreads (bid & ask) in ANTICIPATION I will be a buyer. I would then sell the platinum taking small losses on the gold and silver.
A wash trade today is used to create the illusion of volume where a trader acts as both a buyer and seller to create the impression of depth. This can create thinking among buyers or sellers of an instrument who are waiting in the wings, where others attempt to front run such positions, thereby nudging the market price in one way or the other. But these types of wash trades are not really manipulative of the price direction. The market will move in ANTICIPATION but the trader will then immediately take the profit. Such trades are not capable of sustained manipulation.
These are all very short-term. Even the high frequency trading computers will tend to do some front running. A serious trader with money can easily set them up and actually manipulate those types of systems playing off their algorithms.
You cannot manipulate any market against its trend for once it is out of line, capital will be attracted against that trend. Everything is subject to international arbitrage. That is where those who constantly preach that they would be right EXCEPT FOR manipulation are dead wrong.
Even when the USA overvalued silver placing it at 16:1 when everyone else was 15-15.5:1, that manipulation was broken by international arbitrage. The gold moved from the USA and silver came to the USA where it was overvalued. That led the USA into virtual bankruptcy where J.P. Morgan had to organize a $100 million gold loan to bailout the USA. It was William Jennings Bryan who assumed the U.S. could arbitrarily overvalue silver at the request of the silver miner. They assumed that they could force the rest of the world to adopt their overvaluation of silver. It backfired and the USA became flooded with silver and void of gold.
No matter how many times I say it, or how much evidence I put forth, there are simply people who WANT to believe they have been wronged because of some manipulation. They will cling to these ideas and that will be their doom, for they cannot make the transition to a savvy trader to survive what lies ahead.
