The Dark Side of Markets (2)

WALL STREET SMARTS, THE BLOG, IS NOW WALL STREET SMARTS, THE BOOK.  FULLY EDITED AND REVISED WITH NEW MATERIAL ON AMAZON

In his classic, Reminiscences of a Stock Operator, Edwin Lefevre tells the story of a market trader named Larry Livingston, who, in reality, was Jesse Lauriston Livermore, a famous market trader of the 1920s.  In the book, the operator, Livingston, recounts several market manipulations he was involved in over the years.  I should point out that, at that time, there were few rules in effect concerning various market strategies which today would violate securities laws and the rules of the Securities & Exchange Commission.  In any event, the following is a sort of road map for moving large blocks of stock in the bad good old days or the good bad old days, depending on your perspective.  Several times over his market career, Livingston was hired by people to sell their large blocks of stock for them without affecting the price.  Remember the basic rule governing share prices: supply and demand.  If a large number of shares are offered for sale at one time, the price will drop and the seller's profits vanish.  Here is what Mr. Livingston had to say:

The word "manipulation" has come to have an ugly sound.  It needs an alias.  I do not think there is anything so very mysterious or crooked about the process itself when it has for an object the selling of a stock in bulk, provided, of course, that such operations are not accompanied by misrepresentation.  Usually the object of manipulation is to develop marketability -- that is, the ability to dispose of fair-sized blocks at some price at any time.

In the majority of cases the object of manipulation is, as I said, to sell stock to the public at the best possible price.  It is not alone a question of selling, but of distributing.  There is no sense in marking up the price to a very high level if you cannot induce the public to take it off your hands later.  Let me start at the beginning.  Assume that there is some one --an underwriting syndicate or a pool or an individual --that has a block of stock which it is desired to sell at the best price possible.  The best place for selling it ought to be the open market, and the best buyer ought to be the general public.  Suppose he has heard of me as a man who knows the game.  Well, I take it that he tries to find out all he can about me.  He then arranges for an interview, and in due time calls at my office.  My visitor tells me what he and his associates wish to do, and asks me to undertake the deal.

I generally ask and receive calls (call options) on a block of stock. I insist upon graduated calls as the fairest to all concerned.  The price of the call begins at a little below the prevailing market price and goes up; say, for example, that I get calls on one hundred thousand shares and the stock is quoted at 40.  I begin with a call for some thousands of shares at 35, another at 37, another at 40, and at 45 and 50, and so on up to 75 or 80.  If as the result of my professional work -- my manipulation -- the price goes up, and if at the highest level there is a good demand for the stock so that I can sell fair-sized blocks of it I of course call the stock.  I am making money; but so are my clients making money.  This is as it should be.

The first step in a bull movement in a stock is to advertise the fact that there is a bull movement on.  Sounds silly, doesn't it?  Well, think a moment.  it isn't as silly as it sounded, is it?  The most effective way to advertise what, in effect, are your honorable intentions is to make the stock active and strong.  After all is said and done, the greatest publicity agent in the wide world is the ticker, and by far the best advertising medium is the tape.  I accomplish all these highly desirable things by merely making the stock active.  When there is activity there is a synchronous demand for explanations; and that means, of course, that the necessary reasons -- for publication--supply themselves without the slightest aid from me.

Activity is all that the floor traders ask.  They will buy or sell any stock at any level if only there is a free market for it.  They will deal in thousands of shares wherever they see activity, and their aggregate capacity is considerable.  It necessarily happens that they constitute the manipulator's first crop of buyers.

We will continue with this story in the next blog.

Excerpts from Reminiscences of a Stock Operator, Edwin Lefevre, copyright 1923, republished by John Wiley & Sons, Inc. in the Wiley Investment Classics series, pages 244 - 248

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