Is the stock market rigged ⁉️
Everyone in June after getting COVID-19 vaccines
In this newsletter:
- 5 headlines that pretty much sum up the week
- The cringiest April Fools’ joke this year
- The difference between market manipulation and regular market activity
- Our rec of the week
Five headlines that sum up the week 🚀 📈
1. Markets closed out March with decent results
As was expected, the Nasdaq did not perform nearly as well as the Dow and S&P, due to tech stocks falling short last month as a result of the frequent fluctuations of the 10-year Treasury yield. The Dow and S&P, on the other hand, had its best month since last November. Looking at all of Q1, the Dow and S&P each gained 7.8% and 5.8%, respectively, while the Nasdaq gained 2.8%.
2. Coinbase will go public on April 14, probably
Another big name to go public via direct listing, Coinbase will be listed on the Nasdaq under the ticker COIN. Its date is set for April 14, although the date could change (again). We’ve been hearing about this alleged DPO since December. At this time, its estimated valuation is $100 billion. FWIW’s, Jim Cramer thinks highly of this stock.
3. 15 million J&J vaccines were tossed due to contamination
The cause? Human error. 🙄 Turns out that workers in a Baltimore plant accidentally mixed the ingredients for the AstraZeneca and Johnson & Johnson vaccine. The plant is run by Emergent BioSolutions, a manufacturing partner for both Johnson & Johnson and AstraZeneca. This will delay shipment of the one-and-done J&J vaccine.
4. BlackRock raises $3 billion, enters the private equity-secondary market
BlackRock, the world’s largest asset manager with $8.68 trillion under management, has created a new fund, BlackRock Secondaries & Liquidity Solutions LP. It is now one of the largest debut funds for this type of investment. Why does this matter? Investing in secondary funds is growint explosively – almost $81 billion was raised in 2020. $17 billion has already been raised this year. This investment strategy carries a higher risk, requires less frequent trading and could result in huge returns. Per usual, this is a good way for investors to diversify from stocks and bonds.
5. Nike does not condone sale of $1,018 “Satan Shoes”
Nike filed a lawsuit earlier this week and issued a restraining order barring the Internet collective MSCHF from selling and distributing $1,018 Satan-embellished shoes that the company claims infringes on its trademark. Unfortunately for Nike, all pairs have already been sent out with the exception of its 666th pair – a collab with rapper Lil Nas X. To make things even more complicated, MSCHF has lawyered up to challenge Nike, claiming that customers were aware that the shoe wasn’t designed by Nike. If Nike takes MSCHF to court, this could set a legal precedent that either restricts or permits online sellers who upcycle other designer’s merch.
ICYMI: No one laughed at Volkswagen’s April Fools’ joke
Remember when April Fools’ jokes were limited to infamous celebrities making outlandish announcements that were eventually debunked by the less gullible arm of Twitter? Yeah, we’re looking at you Lindsay Lohan.
Yesterday, Volkswagen decided to put out a now-deleted press release announcing a rebrand and a name change to “Voltswagen.” It cited its reason as “a public declaration of the company’s future-forward investment in e-mobility.” The joke fell flat.
Volkswagen was previously tangled in a diesel-emissions scandal and many haven’t forgotten about that. Considering every automobile company under the sun is looking to pivot to EV, whether it be through legislation or the new status quo, critics expressed that making a joke about this undermines its very commitment to the cause. Others pointed out that it was a nice try at emulating Elon Musk, but VW’s brand simply isn’t hip enough.
The lesson here? We’re one year out from the start of the pandemic, and an entire quarter into the new year, and we’re all still trying to find our sense of humor. Let us all be on edge – we’re trying our best.
The Difference Between Manipulation and Regular Market Activity
- The stock market sometimes appears rigged when a large group or entity sways stock prices in their favor – but in reality, SEC rules are designed to provide an equal shot at making your fortune in securities
- Due to the nature of the economy, deeper pockets often lead to greater influence, which can look like illicit manipulation
- True market manipulation occurs when an investor or entity artificially affects the supply or demand for a security, thereby leading to personal gain
When you invest in the stock market, your goal is the make money based off fluctuations in price. Day traders aim – and largely fail – to make their fortunes by trading securities as soon as prices move favorably. Some investors try to short stocks to make money off a company’s misfortunes. Value investors typically buy and hold securities in the hopes that its fundamentals, combined with market action, will lead to profits over time.
All these methods share a common thread: discovering and exploiting legal opportunities for profit. By doing so, investors – and by extension into the business world, entrepreneurs – benefit themselves with profits, and society by correcting the price of assets and underlying valuables. Over time, this can improve market efficiency while lending everyone an opportunity to make a buck.
In market manipulation, however, the manipulator is attempting to sway prices from their accurate or earned positions. Instead of pouncing upon “naturally” under- or overvalued stocks, such perpetrators intend to create under- or overvalued stocks to make a buck. In the process, they deceive other investors to take part by purchasing or betting on their stocks – and leaving with the money before the bottom drops out of their false market.
As a result of their actions, manipulators directly profit at the expense of investors and corporations. This leads to poorer market efficiency, decreased societal benefits, and unstable economic security. Because a manipulator, by definition, manipulates the market into mispricing its goods, their actions are considered both unethical and illegal.
Types of Market Manipulation
There are literally dozens of ways to manipulate the market – we won’t cover all of them here. Instead, we’ll briefly define some of the more common schemes, each of which attempts to manipulate the market by at least one of the following methods:
- Making securities appear more actively traded than they are
- “Rigging” securities to look like they have higher or lower prices, trades, or quotes
- Spreading misleading information about a company or its stock
Utilizing (accurate) information that is not publicly available to other traders
Insider trading is perhaps the most well-known type of market manipulation. This occurs when business deal or company insiders with confidential – and market-changing – information take advantage of their knowledge to make a profit (or avoid losses) by trading their shares.
Poop and scoop cases are far less common because they’re harder to pull off, but they do occur. In a poop and scoop, a manipulator spreads false information about a stock to convince investors to sell their hand. When the price drops, the manipulator goes all-in on the stock and rides the elevator to unearned profits. Pump and dump schemes are another familiar trope. In these cases, an investor who owns shares of a stock spreads exaggerated or misleading information about the company to hype interest. When the share prices shoot up, the investor sells out, leaving everyone else to suffer losses.
Churning occurs when an individual places simultaneous buy and sell orders at the same process at different brokers. The purpose is to “churn” up the trade volume so that stocks appear more interesting, thereby increasing the price as everyone piles onboard.
Legal Market Manipulation
Of course, it’s possible to manipulate the market legally simply by exerting power. One example of this is the slingshot effect, where a large institutional investor dumps its position in a stock overnight. As a result of the sudden uptick in activity, the price drops, and the institution can later buy back their position at a fraction of the selling price. (We’ll give an example of this below).
Additionally, there are times when an individual investor, such as Elon Musk, engages in manipulative activity without the burden of proof – defined by the SEC as intention to deceive or defraud – needed to count as illegal activity. Such actions include:
- Expressing a genuine belief about a company or stock
- Unintentionally excluding relevant data when you publicly argue your position
- Urging others to adopt your views on a particular security
- Making unintentionally mistaken assertions
Does This Make the Stock Market “Rigged”?
Though many big names eventually are caught, there are most certainly cases where the evidence is too weak to prosecute in court – if the perpetrators are ever found at all. This discrepancy in market manipulation versus criminal indictments often leads investors to ask a hard question: is the stock market rigged?
The short answer is no, the stock market is not rigged. After many high-profile cases – made the books, the SEC put in place rules designed to provide all investors an equal shot at making their fortunes. However, that doesn’t mean that there aren’t disparities that make distinguishing between inequality and illicit activity difficult.
The bottom line
On the whole, the stock market is not rigged. We have the SEC for a reason: to ensure things are fair for everyone. However, while there are legal definitions of what is considered to be market manipulation, keep in mind that there is also a grey area. That is why we’ve seen so much news about alleged market manipulation and a push for accountability, even if untrue.
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