Market Manipulation: What’s The Truth?

In January 2021, a group of people started talking up GameStop to drive up the price of its stock. (Photo by Michael Fortsch at Unsplash)

About 40 years ago in the second half of the 1970s and culminating in 1980, there was a dramatic bull market in gold and silver. Near the end of it, two billionaire brothers, Herbert and Nelson Hunt, used their inherited fortunes to try to corner the world market for silver. Leveraging their money many times with the use of futures contracts, they relentlessly drove the price higher and higher.

At their peak, the Hunt brothers controlled two thirds of the available silver in the world.

A futures contract is an agreement to buy or sell a commodity at a specified time in the future. When the vast numbers of futures contracts owned by the Hunt brothers came due, the sellers of those contracts scrambled to fulfill them because they couldn’t find enough silver—the Hunts already owned most of the silver in the world. This was a short squeeze of magnificent proportions.

At this point, the Commodity Futures Trading Commission (CFTC) and the Federal Reserve stepped in and changed the rules. The CFTC temporarily prohibited the buying of silver futures contracts. Orders were only allowed to liquidate existing positions.

The Hunt brothers had been borrowing money to pay for the massive amounts of silver they were buying. Behind the scenes, the Federal Reserve quietly discouraged banks from lending any money for commodity trading.

The price of silver crashed so hard and fast it bankrupted the billionaire Hunt brothers. The CFTC and the Fed had indeed conspired to end the extreme bubble that had been created, and precious metals fans have been imagining conspiracies ever since.

Among conspiracies I’ve heard, one is that the U.S. Treasury doesn’t want the price of gold to go up too high, so whenever it does, they enlist major banks to sell it down. A lawsuit against numerous imagined conspirators was brought sometime in the late 1990s and early 2000s, but it came to nothing as there was no actual evidence of conspiracy.

This is what did happen: regulators did conspire against the Hunt brothers to keep them from successfully cornering the world’s silver market. And because that one conspiracy was real, it has since inspired hundreds and maybe thousands of imagined conspiracies.

As I investigated many of these imagined conspiracies and observed the nature of the people who promoted them, I began to see an interesting pattern. When the price of gold or silver went up, that was perfectly fine by the theorists. But when the price of gold or silver dropped, it was always because of some imagined conspiracy.

I’m assuming that these fans of gold and silver owned precious metals. So when the price went up, it made them happy. And when the price went down, they began to blame imaginary actors who were plotting against them.

Wait a minute. When things go your way, everything is good, and when they don’t, somebody is cheating? Whether it was conscious or not, that seemed to be the position of the gold and silver conspiracy theorists.

Sound familiar? The drama that played out between November 3, 2020, and January 20, 2021, looked pretty familiar to me after decades of listening to the gold bugs. But I digress—this is a financial column, so let me stick to markets.

The 21st-century version of the Hunt brothers debacle occurred in late January. By the time you read this, it will be old news. I’m referring, of course, to the GameStop (GME) insurrection. And here I must take pains to say that I am referring to GameStop only in reference to its central role in a historic event. Neither I nor anyone associated with me has a position in GameStop and I have no opinion whatsoever on the company or its stock. Nothing I say here should be construed, either directly or indirectly, as a recommendation to buy or sell GME or any stock.

That said, I do have an opinion about what happened and its potential implications.

For those of you who completely missed these events, here’s the scoop. A couple of individuals with a following on Reddit and other bulletin boards started touting GME and other companies. They wanted to drive up the stock’s price until some hedge funds that were betting on a price decline were forced to close their positions, which would potentially drive the price of the stock even higher. This was a popular movement, and it attracted a large number of small traders who collectively drove up the price. At least one hedge fund was hurt rather badly.

Without going into a lot of detail, the point is that this insurrection or movement or whatever you want to call it was market manipulation, plain and simple. What happened was not about investing. It was about speculating, and even worse, it was about manipulating the price of a stock in order to trigger an event. It was about a group of people banding together to game the system (and it’s truly ironic that a gaming company stock was central to all this).

I’m hearing a lot about how these traders attacked a system that is rigged against them by billionaires, hedge funds, and regulators, and somehow this justified colluding to manipulate a small part of the stock market. It all sounds very romantic, but the fact is that market manipulation is wrong whether it’s done by hedge funds or small individual traders. The complaint that the hedge funds have been manipulating the system against small traders does not make it right to turn the tables against them. As my parents taught me, two wrongs don’t make a right.

After the Hunt brothers debacle, new rules and regulations were put in place with the goal of preventing anyone from using U.S. commodity exchanges to corner any commodity market. So far those rules have worked.

Treasury Secretary Janet Yellen has called for meetings to discuss what happened in the GameStop fiasco. Some congresspeople have called for an investigation. As with the Hunt brothers episode, new regulations are likely to emerge from this experience, with the aim of reducing or eliminating collusion for the purpose of manipulating a market.

If such rules emerge, I can already hear the complaints about the system being rigged against small traders. I heard that objection when the online brokerage Robinhood stopped allowing buys on GameStop stock. Robinhood did this to protect itself. But the complaints said it was done to stick it to the small trader, who was once again getting cheated by “the Man.”

What really happened was that people with little or no experience and insufficient capital engaged in a dangerous speculative game. If they had lost, no one would have been surprised, unless they’re the kind of people who think that the game is only fair if they win.


Hal Masover is a Chartered Retirement Planning Counselor and a registered representative. His firm, Investment Insights, Inc is at 508 N 2nd Street, Suite 203, Fairfield, IA 52556. Securities offered through, Cambridge Investment Research, Inc, a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Investment Insights, Inc & Cambridge are not affiliated. Comments and questions can be sent to hal.masover@emailsri .com. These are the opinions of Hal Masover and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. Past performance is no guarantee of future results.

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