Market “manipulation”: dynamics in play or sinister plan?
Hello, friends. In the wake of GameStop, bitcoin and other market bumps, I’ve been asked how, when and why markets can be manipulated—and, significantly, whether these are intentional impacts or, in essence, simply market dynamics at their laissez-faire finest (at least, until the SEC steps in).
Before we get into this, it bears noting that overall the markets show continued resilience and optimism, buoyed further by the near certainty of another round of stimulus funding and forward progress on several issues (even some bipartisan support). This is particularly true in the U.S. and parallel to this, health care and tech lead globally, too.
Market “manipulation”—my view
For the purpose of this post, it’s important that I define how I’m using “manipulation.” It often has a negative connotation, but I believe that markets can be both positively leveraged (aka, manipulated), as well as nefariously maneuvered (aka, manipulated):
When a person, company or group acts intentionally to cause harm to another person, company or group via the markets, that’s clearly negative manipulation (and possibly illegal).
It’s also possible to shape the markets in ways that can be more beneficial to investors—and that’s where government typically comes in by providing regulatory oversight, as well as by providing stimulants (like tax breaks) that incentivize long-term investment—something that we see clearly both through stocks (with lower capital gains taxes on longer-term investments, for example) and via numerous real estate tax breaks.
SOURCE: Investopedia, “Market Timing Tips Every Investor Should Know”
Further, for a stock or asset class to move significantly, there has to be more buyers than sellers that see value or opportunity. There also has to be the potential for excess valuation, as well as the potential for significant (and often rapid) volatility.
These are fundamental principles of market mechanics. Without them, everything else on this topic is essentially moot.
On that note, let’s not forget that in markets, timing is everything—and for that reason, we’ll revisit time series and moving averages in an upcoming post (I’ve touched on them in previous posts and have had a lot of interest and follow-up questions, so stay tuned).
When people can move markets
Professional traders and financial advisers are subjected to so many regulations that it’s unlikely (though not impossible) for them to manipulate markets.
Business leaders and celebrities (and those who are both, like the Jeff Bezoses, Warren Buffets, Jack Mas, and Elon Musks of the world) can have a rapid and significant impact on a stock or asset with a public declaration of their intentions or actions. This was the case earlier this week, when Musk revealed Tesla’s major investment in bitcoin and the planned acceptance of the cryptocurrency for Tesla purchases. Bitcoin subsequently rose to a record $48,000+.
SOURCE: BBC News, “Bitcoin Sets Fresh Record After Elon Musk Investment”
Similarly, when Buffett announces that Berkshire Hathaway is investing or divesting a stock, you can be certain that others will follow. When Jeff Bezos announces that he’s stepping down as Amazon’s CEO, you can also rest assured that investor sentiment regarding confidence in the company’s subsequent leadership will be reflected, immediately, in the stock’s valuation and trading volume.
But I don’t view these as overt manipulations of the markets, when “manipulation” is considered a deliberate act with a (potentially) negative impact. Instead, these really are just markets reacting to people with tremendous power and reach—in essence, it’s simply market dynamics at work.
Still, when someone in a position of power and influence does something intentional and potentially negative—buying a large quantity of shares, for example, and then pulling back -- that could be seen as intentional manipulation and set them up for regulatory consequences.
There are also television personalities on financial news channels discussing various stocks and asset classes and given their broad reach, they can potentially move (and manipulate) markets. Jim Cramer, host of CNBC’s wildly popular Mad Money show -- is a good example.
What about GameStop?
I spent a lot of the last post discussing GameStop and we’re collectively still watching to see the fallout. This situation showed us, though, that through the magic of social media, a group of determined investors can have significant impacts on a particular stock or even an asset class.
Blips like GameStop and silver last week are not without impact: There’s reason to think that they were intentional manipulations of the market and certainly, they exposed ways that the markets can be shaped by a group of renegade investors.
Still, I think the fundamentals will win out. Historically, they always have and the current frenzy seems unlikely to be sustainable (although I don’t think the approach will go away anytime soon, as it appeals to a particular set of investors).
Regulatory oversight mitigates impacts
Given last week’s events, it might appear that markets are easy to shape but truly, these are short-lived episodes, in large part because the markets are actually quite hard to manipulate in a way that’s both detrimental and lasting. From my perspective, while it’s possible for markets to be “manipulated,” then, it’s also really difficult for individuals or firms to do so on a broad and lasting level -- there are simply too many regulations in place to prevent such occurrences.
Having said that, though, and for all intents and purposes, markets can be more easily accomplished when there’s more leverage available.
For example, in stock markets, millions of investors play with an infinite combination of shares, derivatives, options, ETFs and more as billions of dollars are moved by the millisecond. By the very nature of stock markets, then, they’re more prone to manipulation, because of the additional derivatives that create additional leverage: the more leverage, the more amplification of volatility can occur.
Can residential real estate be manipulated?
SOURCE: Habitat Hunters Realtors, Austin
When it comes to residential real estate, the system is wrapped in such granular and clunky transactional systems that it’s much harder to have significant impacts ala GameStop.
Consider this: It’s the norm, still, for government entities as small as villages and hamlets to dictate some facet of each residential sale. Add to this the requirements for surveys, lien searches, underwriting, insurance and more and it’s easy to see why closing on a house can take 4 -10 weeks, at best. And, frankly, the system hasn’t changed for decades and decades because its inefficiencies prove very profitable for a lot of businesses.
For the most part, too, residential real estate is privately held (with the exception of major multifamily developments, like apartment complexes and retirement communities), which further limits the ability to maneuver it.
The significant differences in how pliable residential real estate is compared to equities, then, are the lack of instantaneousness access. There is a benefit to all this, too: Until it changes broadly across real estate markets, this perhaps offers both some predictability and protection.
AI and real estate markets
Artificial intelligence and algorithms are changing the nature of how real estate is transacted, but in my opinion, we’re not yet at a point where it’s really open to manipulation. Instead, what we see in residential real estate are longer-term evolutions and regressions based on factors outside of the markets: government incentives or penalties, mortgage-rate fluctuations, man-made and natural disasters among them.
Other than those, the only way I see market manipulation is through a focused and expensive play on a particular market -- a billionaire buying up properties in a specific market with limited availability, for example.
Still, that’s clearly a limited prospect on many levels, although the profusion of online brokerages seems to be pushing this trend, so it bears watching now to gain an early sense of the impact on—or manipulation of—markets.
As I’ve said many times, too, in real estate it comes down to pricing—whether a market is hot or not, or whether a home sells or not is often due to how it’s priced and what the market will bear. (Think about it in terms of stocks: Would retail-level day traders be as likely to jump in if it cost them tens of thousands—or hundreds of thousands—of dollars per deal, as it does when real estate is purchased?) However, I am a true believer in democratizing real estate and its transactional capabilities to make it easier to transact business.
Our glass is half full and then some
While it’s easy to get caught up in whatever happens in a week or day or micro-moment in the markets, let’s not forget that the fundamentals of our democracy are what make our markets work. So, yes, the more players there are and the more options there are, the more opportunities there are for someone to find a way to send it sideways.
Still, the democratization of investing is a good thing—a way for more Americans to join in the game and build wealth. And we should always remember how fortunate we are to live in a country where we have the freedom to choose to participate and to create wealth.
