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A Grand Unified Theory of Market Manipulation

A Grand Unified Theory of Market Manipulation

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Published by ejlamas

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Published by: ejlamas on Aug 03, 2009
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08/04/2009

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Disclaimer: The information in this report is general market commentary and for educational purposes only. No personal trade recommendations are beingmade hereby. Trading futures is highly risky and you can lose a substantial amount of money. Past performance is not necessarily indicative of future results.
©
 
Precision
 
Capital
 
Management,
 
LLC
 
2009
 
1
 
|
 
P a g e
 
A Grand Unified Theory of Market Manipulation
a weekend supplement to
The Precision Report
August 2, 2009
 
Disclaimer: The information in this report is general market commentary and for educational purposes only. No personal trade recommendations are beingmade hereby. Trading futures is highly risky and you can lose a substantial amount of money. Past performance is not necessarily indicative of future results.
©
 
Precision
 
Capital
 
Management,
 
LLC
 
2009
 
2
 
|
 
P a g e
 
 Background 
 
There is much speculation and anecdotal information regarding the rally that began March 6 2009, which havesuggested the gains are the result of massive manipulation on the part of the Federal Reserve (FR) and the largeinstitutions that dominate Treasury securities dealing, program trading and the derivatives markets. Traders havereported that traditional indicators and metrics used for market analysis stopped working for periods of time oraltogether, and that correlations among markets have been erratic and quick to change. Record program trading byGoldman Sachs as reported by the NYSE, heightened focus on high frequency trading (HFT), outsized profits by thelarge and well-connected banks, along with unprecedented intervention by the FR in the markets only fuel themanipulation speculation.If we had a big picture model (a Grand Unified Theory, or G.U.T.) that described the intentions, motivations andactions of the influential players, we could attempt to predict future market direction. A limiting factor is that therules of the game have changed quickly, and what we believe is important to the major players now may notnecessarily have been important twelve or even six months ago. Accordingly, while we will present as muchsupportive data as possible, our sample sizes will be small and we will rely on educated conjecture when necessary.As such, we would expect to be, at worst, self-referentially coherent and, at best, correct in our predictions for thecoming weeks and months.
The POMO Effect
The theory for which we have the greatest supporting evidence of manipulation surrounds the fact that the FederalReserve Bank of New York (FRNY) began conducting permanent open market operations (POMO) on March 25,2009 and has conducted 42 to date. Thanks to Thanassis Stathopoulos and Billy O’Nair for alerting us to the POMOEffect discovery and the development of associated trading edges. These auctions are conducted from about 10:30am to 11:00 am on pre-announced days. In such auctions, the FRNY permanently purchases Treasury securitiesfrom selected dealers, with the total purchase amount for a day ranging from about $1.5 B to $7.5 B. These days arehighly correlated with strong paint-the-tape closes, with the theory being that the large institutions that receive thecapital injections are able to leverage this money by 100 to 500 times and then use it to ramp equities.To wit, the following charts are Time Profiles that we created to show the net point accumulation in the eMini S&P500 (with other statistics) for each hour of a trading day that meets selected criteria (except that the last
hour 
of theday is only 45 minutes). For an explanation of Large Player Effective Volume
TM
, please see the creator’s website atwww.effectivevolume.eu.The first chart covers the rally from the date of the first POMO on March 25 2009 to present (through July 31 2009)and shows only those 42 days on which POMO were conducted.
 
Disclaimer: Tmade hereby.
©
 
Precisio
Chart 1
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Capital
 
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umulatively itely obvious.e are also othency (Freddiee for Treasuryese days (not
 
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n the S&P 500As an aside, tr tradable edgFannie) securiPOMOs. Weshown), but itere conducted.
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in the final 4e dip into thes on which wities with usuacall these Agis less pronou.
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minutes of tr12:30 to 13:3eupdate readelly only a day’ncy POMO dnced. Followi
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a g e
 

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