The Markets Are Being Manipulated

I have already mentioned this briefly in my blog entry about the SEC and FSA prohibiting short trades on certain stock markets, but this is such an important topic, that I want to make sure that traders understand exactly how this affects their trading.

In case you are not yet aware of this, the US SEC (Securities and Exchange Commission) and the UK FSA (Financial Services Authority) have prohibited short trades (trades that are entered by selling, and make a profit when the price moves down) on approximately 832 stock markets. The stock markets that are directly affected include a variety of financial service companies, such as banks, insurance companies, and securities companies. This is blatant market manipulation, that affects not only the specific stock markets, but a range of other markets as well.

All markets move because of market dynamics and the principles of supply and demand. When short trades are prohibited, half of the market dynamics, and half of the supply and demand, have been removed. This prevents the markets from moving in their natural ways, and whatever price movements do occur will be completely unpredictable. This means that whatever analysis you have performed is no longer accurate, and whatever market knowledge you have gathered no longer applies. You can try trading carefully, but in reality, the only safe way to trade in this situation is not to trade at all. By not trading, you are protecting your capital, and will be one of the traders who still have a trading account when the dust settles (i.e. when the short trade prohibition is cancelled).

The markets that are affected by this include:

• the 832 stock markets (banks, insurance, securities, etc.),
• any futures markets that are based upon stock indexes that include any of the 832 stock markets (such as the S&P500 and the FTSE100),
• any options markets that are based upon any of the 832 stock markets,
• and any options markets that are based upon any of the affected stock indexes.

As a final note, in case you were thinking about going long because now there is no way that the markets can go down, think again. Whenever the financial markets start to move significantly down, a government somewhere tries to stop them from doing so. Like all of the previous failed attempts, this manipulation will not prevent the markets from going down. If the markets decide that they are going to move down, nothing will stop them from doing so.