Sunday, April 19, 2009

Conspiracy? Is Goldman-Sachs Running the "Plunge Protection Team?"

April 14, 2009

Eben Esterhuizen, HuffPost

Is the current stock market rebound based on fundamentals, or are more sinister forces at work? Tyler Durden, one of the best financial bloggers around, have found some circumstantial evidence that suggests the mysterious Plunge Protection Team (PPT) has recently been boosting the stock market. And some might say Goldman Sachs is running the show...

The Working Group on Financial Markets, known colloquially as the Plunge Protection Team (PPT), was created in 1988 by Ronald Reagan, in response to the Black Monday stock market crash in 1987. Their operations have always been shrouded in secrecy, with a Washington Post article from 1997 writing that the group aims to prevent the "smoothly running global financial machine" from locking up.

Conspiracy theorists have long claimed that the PPT manipulates U.S. stock markets by using government funds to buy stocks in the event of market dislocation, but skeptics argue that such an operation would be unworkable.

Durden, author of the ZeroHedge blog, thinks he found some evidence of the PPT's interference with the market. He cites an unusual piece of data on program trading, a part of the stock market that is controlled by mysterious computer programs that use mathematical formulas to buy and sell stocks.

According to the New York Stock Exchange, last week's volume of program trading was 8% higher than the 52 week average. It's strange that program trading volume would be increasing so sharply when overall market volume is declining, says Durden. It's even stranger to note that principal trading, which occurs when a brokerage buys or sells stocks for its own account, is running 21% above 52 week average. New York Stock Exchange weekly volume, on the other hand, is running about 9% below 52 week average.

"A very interesting data point, also provided by the NYSE, implicates none other than administration darling Goldman Sachs in yet another potentially troubling development," writes Durden. "Key to note here is that Goldman's program trading principal to agency+customer facilitation ratio is a staggering 5x, which is multiples higher than both the second most active program trader and the average ratio of the NYSE, both at or below 1x."

The implication is that Goldman Sachs trades much more often for its own (principal) benefit. "In this light, the program trading spike over the past week could be perceived as much more sinister," he says. "For conspiracy lovers, long searching for any circumstantial evidence to catch the mysterious "plunge protection team" in action, you should look no further than this."

My colleague at Kapitall, David Neubert, disagrees with the conspiracy theory. David was the head of program trading at Morgan Stanley from 1996 to 2002 (both Global and U.S.), which, at the time, was the NYSE volume leader. "Program trading volume on a proprietary basis can come from many things, all of which make pushing the entire market higher difficult to nearly impossible," he writes.

"The only thing that can drive a market higher is buyers willing to pay more than current market prices," writes Neubert. "Among the many financial market abuses that have occurred in the past few years, portfolio (program) trading is not among them."

Is the PPT a Wall Street fairy tale? I don't know the answer. But it's interesting that Goldman Sachs recently announced a $5 billion stock issue plan. Come on, conspiracy lovers, tell us what you think. Did the PPT push stock market prices higher so that Goldman could get a better price for their stock offering?

No comments:

Post a Comment