Friday, September 26, 2008

Making money on manipulation or partisans

Matt sends me the following graph of some interesting trading on 22 September. At 9:11 am, a single trader (he tells me) bought about 1200 shares of PM.National, running the price up from $0.7376 to $0.82. Traders came in almost immediately to drive the price back down. They started selling PM.National starting at 9:13. By 9:30, the price had been driven back down to $0.7678; at noon, the price was $0.7503. At 5:30 PM, the price was right back where it started at $0.7376.

Was this a manipulation attempt? I find it doubtful. First, there was no complementary selling on the Labour side. Over the time period, the price on the PM.Labour event derivative dropped about 2 cents and then came back up. Second, there was no sustained attempt to keep the price up. What seems most likely to me is that somebody with a very strong belief that National is set to win the election, and very little patience to put in limit orders, wanted to buy a lot of shares and wanted to buy them very quickly.

What I find remarkable is how quickly other traders responded to the anomalous price spike. Two minutes after the price spike, the first selling started. Within 20 minutes, selling by other traders pushed the price down by more than 60 percent of the initial rise. These markets are robust.

Like I said in my previous post, partisans of either party are profit opportunities for informed traders. Folks who had left limit sell orders in place for a good run up were able to sell PM.National to somebody desperate to buy at any price and then could buy back the stock after the price had dropped to reasonable levels. Folks who were watching the market were able to profit by pushing the price back to a level in line with fundamentals. I wish I'd been paying more attention to the prices at 9 o'clock Monday morning so I could have shared in the fun!

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