The Dark Side of Markets (3)

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

We will continue the description of a "manipulation" by Larry Livingston to sell a large block of stock, as recounted in Edwin Lefevre's Reminiscences of a Stock Operator.  The last blog ended with him starting his campaign by generating trading activity in the stock to attract the attention of the professional traders on the floor of the exchange (the New York Stock Exchange, in this case).  We will pick up the story at that point.

To get a professional following, I myself have never had to do more than to make a stock active.  Traders don't ask for more.  It is well, of course, to remember that these professionals on the floor of the Exchange buy stocks with the intention of selling them at a profit.  They do not insist on its being a big profit; but it must be a quick profit.

I make the stock active in order to draw the attention of speculators to it, for the reasons I have given.  I buy it and I sell it and the traders follow suit.  The selling pressure is not apt to be strong where a man has as much speculatively held stock sewed up -- in calls -- as I insist on having.  The buying, therefore, prevails over the selling, and the public follows the lead not so much of the manipulator as of the room traders.  This highly desirable demand I fill -- that is, I sell stock on balance.  If the demand is what it ought to be it will absorb more than the amount of stock I was compelled to  accumulate in the earlier stages of the manipulation; and when this happens I sell the stock short -- that is technically.  In other words, I sell more stock than I actually hold.  It is perfectly safe for me to do so since I am really selling against my calls.  Of course, when the demand from the public slackens, the stock ceases to advance.  Then I wait.

Say, then, the stock has ceased to advance.  Whatever the reason may be, my stock starts to go down.  Well, I begin to buy it.  I give it the support that a stock ought to have if it is good odour with its own sponsors.  And more:  I am able to support it without accumulating it -- that is, without increasing the amount I shall have to sell later on.  Of course what I am really doing is covering the stock I sold short at higher prices when the demand from the public or from the traders or from both enabled me to do it.  It is always well to make it plain to the traders -- and to the public, also -- that there is a demand for the stock on the way down.

As the market broadens I of course sell stock on the way up, but never enough to check the rise.  It is obvious that the more stock I sell on a reasonable and orderly advance the more I encourage the conservative speculators, who are more numerous that the reckless room traders; and in addition the more support I shall be able to give the stock on the inevitable weak days.  By always being short, I always am in a position to support the stock without danger to myself.  As a rule I begin my selling at a price that will show me a profit.  but I often sell without having a profit, simply to create or to increase what I may call my riskless buying power.  My business is not alone to put up the price or to sell a big block of stock for a client but to make money for myself.  That is why I do not ask any clients to finance my operations.  My fee is contingent upon my success.

I repeat that at no time during the manipulation do I forget to be a stock trader.  My problems as a manipulator, after all, are the same that confront me as an operator.  All manipulation comes to an end when the manipulator cannot make a stock do what he wants it to do.  When the stock you are manipulating doesn't act as it should, quit.  Don't argue with the tape.  Do not seek to lure the profit back.  Quit while the quitting is good -- and cheap.

The book also contains an account of an actual stock that the operator, the fictional Larry Livingston, manipulated.  This is yet another reason for you to read this classic of investment literature.

In January, 2011, I wrote a series of blogs in which I introduced my readers to various financial terms by chronicling the organization of a fictional business, Best Blogs Ever, Inc., and the story of its operations and financial growth.  I did not conclude the story at that time, but promised to do so at a later date.  That time has arrived.

Excerpts from Reminiscences of a Stock Operator, Edwin Lefevre, copyright 1923, republished by John Wiley & Sons, Inc. in the Wiley Investment Classics series, pages 248 - 250

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