"Hi Bill - I enjoy your site. One recurring theme I notice you return to is that there are traders on the Street who merely take the other side of a trade to "spook" the other side - especially if the other side is fundamentally-based. I was wondering if you thought, as I do, that this might be an interesting topic to address on your web site for your readers. With your extensive experience, I'm sure you can provide us some insight on the psychology and motivations of these traders, how effective they are, do they work together or are they merely of the same mindset, and what to do if you are on the "other side" of them and are getting hurt by their (seemingly) irrationality. /Patrick"

I hate it when people, while being interviewed on TV, say "That's a great question," but that is a great question. I just don't have a good answer.

I can only speak from past experience, but I will say that I do believe there are groups of traders acting in concert, today, constantly. And the object of their intentions is to get you to take actions you otherwise would not take, as they are probably not in your best interest.

I once sat in a U.S. trading room for a day while I discussed a side deal (about financing) with the head trader. He seemed to have a list of probably ten or more stocks he traded and several times during the day, he would shout into his squawk box (linked to traders in other rooms and cities) the name of a stock, followed by "Clean the street!"

Then I could observe fairly small bids in the market being taken out by his offers for that stock, then large blocks for sale shown by him and his group (to scare other buyers), quickly depressing the bid-offer. Then immediately they'd pull their offers and all enter smaller -- but escalating -- buy orders that would move the stock to a higher level before other buyers (presumably the public) would step in to take the stock even higher.

It was like a dance. One party would lead; the other follow.

All that this group was doing, however, was manipulating prices.

I can't say this practice goes on a lot because, in the case of the chap I was observing, I saw him about four weeks later as subject of a 60 Minutes-type show " "48 Hours" I think it was. I think he was subsequently arrested for securities fraud.

You know, it wasn't that many years ago where the NASD forced a lot of the small penny stock market makers to clean up their act. Some associates had even registered under different broker-dealer names but were working out of the same office and using the same telephone system. It's true.

I guess it was a crook's way to evade the ‘wash trading' rules. But I still wonder how much illegal trading goes on, especially in penny stocks, which is one reason I don't trade them.

There has been a study in the past month by market regulators in Canada that was regarding trading practices by industry people. The regulators say they believe that front running and trading manipulation is prevalent, but can't seem to prove it.

Regulators might start by banning all cell phones (with respect to registrants handling trading orders) and also requiring that physical tape recordings be kept for several years instead of a couple weeks.

I was one of the first to require full tape recording of all the phones in my broker-dealer office. It worked too, and guess who got caught first?

Me!

My two licensed assistants did the majority of the trading for my accounts. One day a client complained that his entire position was sold, and while he didn't want to complain, because he was thinking he might do that some day anyway, he said he was absolutely certain of the instructions given.

No problem, I said; I'll pull the tapes.

I called in the trader who was just as definite that the trade was done properly, so I asked for the trader to go to the back office and review the actual recording with the manager. A few minutes later, the trader returned looking glum.

That cost me a few thousand, but since it was the trader's first mistake of that kind, I couldn't (didn't) take it any further. The client was almost embarrassed that I'd be so honest.

Now I'll tell you why tape recording all orders is so important. A year or two earlier I had been working for Dean Witter, and just happened to be covering for our gold analyst who was out of the country. Something major (but unexpected) was announced as going to happen after the close that day, which I could see would affect one of my associate's (not my) accounts.

So I called the client and left two urgent messages on an office call-answer machine. I received no call back, and subsequently the market event occurred.

The following day, with the analyst still away, I received a call from the client, who proceeded to scream and swear, and so forth. I filed a report because I just sensed a lawsuit. A couple months later, Dean Witter, the analyst and me, were sued.

When I went into discovery, there was a lengthy discussion with the client and the lawyers present, as to these messages and conversations. The client denied receiving my calls on day one. I was explicit as to the messages and then what was later said between us, even going through the back and forth dialog which I had covered in my notes.

The client lawyer then put a tape recording on the table and asked if, one more time, I wanted to change my "story". At that point I laughed and looked the client in the eye and said, "Don't embarrass yourself. I'm not changing a word."

The transcripts were funny, actually. When I said this and that, the transcript read "this and that", and when I said the client responded with, "You mother****!!!", the transcript read ("omission"). Over and over, there were blanks in the transcript.

He had erased the evidence.

I then said to the (former) client, "You really are an idiot" and left the room. He withdrew the complaint.

But after that, I said that I'd never work again in a place that didn't have full tape recording facilities. You see; it's only the crooks and scoundrels (both sides) that don't want records around.

Taping doesn't stop all the funny stuff, but it makes it harder.

Sometimes, even the crooks don't care about being caught on tape. But, that's a different story.

Once a client of mine sold a small part of his company to what turned out to be a New Jersey organized crime unit. He called me at 6 am one Saturday to ask if I had read the front page of the Report On Business, and I replied I was still in bed. But there it was, my client, after being told by the reporter he was dealing with the mob, being quoted that he would never deal with those people.

He then figured they would retaliate " so I called the lawyer who did the earlier deal and asked him to call the police since I wasn't a lawyer and didn't want to be on the record.

On Monday, the stock was off about 75 percent. Then the mob did call my client's company (350 employees) and threatened consequences, so I called the head of security for the Toronto Exchange. Was I surprised, when the man said, "Oh, you mean Bob. Bob has phoned the Exchange probably 70 times threatening to kill me. My staff thinks I ought to be worried."

Well Bob called me later in the day too when I refused to honor my client's order (given under total intimidation) to buy half their stock back at a much higher price. That was a lot of money.

So I said to Bob that I knew who he was, and that I had a tape recording system that caught everything he was saying. And, you know, I should not have been surprised when he said he didn't care.

Then I called the TSX and recommended that they suspend the stock from trading (on the venture board) before somebody got hurt. It was suspended.

Over the years as a broker I have also observed isolated cases where huge, basically unfillable, orders were placed near the close, which gave the appearance of strength or weakness, and then just let die. Just for appearances sake.

But all these examples of market manipulation, or attempted manipulation, involve small cap and micro-cap stocks, which is why I feel more comfortable trading large cap stocks.

But even with large cap stocks, there are mind games being played all the time.

In fact, I totally believe that PR from Hill & Knowlton sold the first Gulf War to Americans in 1990, and if they can do that for about $12 million in fees paid by Kuwaiti oil sheiks (read this link if you don't recall the details), then I believe anything is possible.

In fact I think Americans are constantly being bombarded by false messages that cause them to act unwittingly against what may be in their personal best interests. I think Canadians and Europeans do not have it so bad.

Today, AIG's Hank Greenberg is getting raked over the coals, but who is to say that Warren Buffett hasn't used some chump change to set up a good story. I don't know for sure; do you?

Why do the media waste our time with interviews with people having vested interests? Are we going to learn something new?

Was Warren Buffett today going to say anything different than "I told them all I knew (ha ha)" or the Saudi oil minister going to say anything different than "Crude oil prices are too high; we're going to increase production now and save the pocketbooks of the complaining Americans"?

If this were pure entertainment, we could all have a good laugh; but it's about money, and we shouldn't be laughing.

It is really all broadcast media intended by faceless people to have a psychological impact. They do it because it has worked well for them in the past.

The motivation by traders to deceive others is always the same; they want you and me to lose. Nothing more. We typically lose by making mistakes when we think (from the information we have) that we are doing the right thing.

The important point I make in this blog is forgettaboutit. It's just storytelling that is intended to play your emotions.

At the end of the day, the little guy has only the facts (audited corporate fundamental data plus securities trade data) and a cause-and-effect paradigm to use in the protection and building of their wealth. Everything else is just talk.

And, as I started by saying, all the serious "talk" about money -- if it leads to transactions -- should be recorded and analyzed, because some of it will later be found to be illegal.

You know it, and I know it.