Ask Colin

Do gaps represent institutional manipulation?

The detailed question was:

In your experience, do you feel the market is being manipulated at the moment or are the current large moves and gaps just part of the usual journey?  Or are the gaps due to low volumes in Aus?  I can’t recall seeing so many large gaps although haven’t been around that long I guess (no offence!). For example, SEK seemed to report large/record profit and increased dividend today and got smashed ever since the open.  I don’t hold any but know that you used to (sold in June) on previous gap down and they’ve been on my watchlist for a while.  Don’t comment directly on SEK.

Jesse Livermore used to say that institutions would short sell heavily into stocks before they bought in to ensure there is buying support for when they want to get out.  If the price continues down they make money anyway.  It seems to make sense with some of these unusual moves/gaps.

I am finding the gaps very frustrating as they go through stops without triggering so you (sic) end up with bigger losses than you (sic) expect.

No, I don’t think there is much manipulation. It sounds to me as though you may be a bit too focused on conspiracy theories. That is not a healthy investment mindset.

 

Seek has a chart with many gaps on it, by the way – not just today. It is good  to get to know the character of the market in a stock before you trade in it or before you place your stops, even if you are an investor rather than a trader. That said, if you understand position sizing, gaps are a nuisance, but not that harmful really. See my recent experience in Brierty on the website.

 

Generally, stocks gap up or down when news is announced that the market did not expect. So, a large loss might be announced, but if the market expected a larger loss, it might gap up. Likewise a record profit might be announced, but if it was less than the market expected, it might gap down. It isn’t the news in isolation, it is in relation to expectations that causes gaps.

 

Jesse Livermore lived in a different time and the market was far different. As I recall, he was not talking about institutions (there was no real institutional market in his day). He used himself to test whether buying was solid by selling first. That can still be used today slightly differently if you are a short term trader because a great deal of the volume is not on the depth screen.

 

I don’t think it is relevant to an investor, whose mindset (buyer of part ownership of a business) and time frame are quite different.

 

As an example of what happens often: I have put an order in the spread and it is filled instantly by a buyer or seller who is not showing their hand. Then I place an order for my other portfolio and it is done instantly too. A big buyer/seller is clearly there undisclosed.

 

That is interesting, but is done to avoid the  HFT boys, and is of no relevance to me as an investor.

 

Keyword: