Monday, October 13, 2008

The Emotional Trader & Manipulative Money Man

Two films that could describe the current financial mess are Ben Younger's Boiler Room and Sameer Hanchate's Gafla.

Emotional meltdown...

In Boiler Room we see how young men are trained and even encouraged to cheat people out of their money. The brokers lie and do whatever it takes to get their clients to throw away their hard earned money because they all want to be quickly rich so as to emulate their hero in the form of Gordon Gekko (played by Michael Douglas) from Oliver Stone's Wall Street. There is a scene near the film's where the brokers are taught, from Ben Affleck's character, not to sell stocks to women because they are told that women are too emotional and would constantly phone in when the stocks fluctuate every hour. While Ben Younger may have gotten away with writing this line back in 2000, he could not have inserted these words if he had to make the film today. That's because in today's wall street it is the male brokers and traders who are emotional and are simply gripped in a panic state. Some male traders have suspended their rationale and are even emotionally judging the cold hard logic of software programs. In last month's New York Times, there was an article which talked about how automated trades are triggered by robotic algorithms. This certainly has the potential to cause a lot of damage as it did back on Sept 7 when in "a matter of about 12 minutes more than $1 billion in stock-market value [of United Airlines] evaporated".

This is how things unfolded:

At 1:36 a.m. E.D.T. last Sunday, Sept. 7, Google’s search “crawler” picked up a 2002 news article about United filing for bankruptcy from the Web site of The South Florida Sun-Sentinel; for some reason the outdated story had been listed on The Sun-Sentinel’s list of most popular business stories. (United emerged from bankruptcy protection in 2006.)

The next morning, an employee of the investment advisory firm Income Securities Advisors saw the story and posted it to the company’s own wire service, which is available over Bloomberg’s trading terminals. United’s stock plummeted soon after.

The story tries to underplay the human error: Human error seems to have played only a minor role. The financial damage was mostly the result of the interplay between the algorithms that search and compile information from the Web and the ones that Wall Street firms and hedge funds use to make trades automatically.

I disagree. The problem with this flow of events is clearly down to human error. The first fault lies with the programmers who created the web robot -- the algorithm should only have picked up new stories but in this case it picked up an old story. Even if the story was posted on Sept 7, I am sure a timestamp somewhere on the story would have indicated it was an old story. But the bigger error took place when the employee unleashed the story on their wire service without even checking the timeline of the events.

Can any of these panicked men take a minute to calmly think things through? Seriously...

Manipulating the markets..

What was more worrisome about the above story was the following situation:
Witness another recent case that had the potential to cause a stock market wipeout, but benefited from serendipitous timing: after the close of trading on Aug. 27, Bloomberg News inadvertently released an obituary of Steve Jobs, the chief executive of Apple — who, despite frequent rumors of ill health, was, and is, very much alive. The story was quickly retracted.

How on earth does someone "inadvertently" release an obituary of someone? The story does not elaborate on this at all. But in another article, the following lines attempt to justify this mistake: It's not out of the ordinary at all that Bloomberg would have this written; all major news outlets have notable persons' obituaries prepared in advance so that only minor changes need be made at the actual time of death. That way, the news can be reported almost immediately and can be updated with further detail.

Uh-huh. Sure. But did it occur to anyone that this might be a ploy to actually manipulate the stocks? Maybe someone was not happy with release of the iPhone?

Sameer Hanchate's Gafla is based on the life of Harshad Mehta, a man charged with stock manipulation. But the film shows a different take on the situation and depicts powerful men purposely trying to manipulate the stock market for their own interests, while turning Mehta into a scape-goat. Ofcourse, the truth will never be known because Mehta died in jail but it is not hard to believe that the markets can sometimes be manipulated to suit certain people's needs.

[Update, Oct 14: It seems there was a temporary relaxing of the panic state in Canada today, following the record surges in Wall Street on Monday, Oct 13.]

1 comment:

sanjay mundada said...

Dear member, The actual and true story about Harshad Mehta can be seen here Harshad Mehta It has very beautifully described every bit of 1992 scam.