Easy Money Through Market Manipulation? Get Real.

A random comment on a random stock blog got my ire up the other day. Someone claimed that companies like Barron's -- owned by News Corp. (NASDAQ: FOX  ) make top stocks lists in order to turn a profit on their investments. This claim was specifically that by having Apple (NASDAQ: AAPL  ) on a "10 Favorite Stocks for 2013" list, Barron's was attempting to drive up the value of Apple after having talked it down earlier in the year. Let's examine the facts.

Why move a market?
First of all, we need to acknowledge that loose lips do in fact sink ships. The Barron's list seems to have successfully pushed Barnes & Noble (NYSE: BKS  ) shares higher on Monday, arguing that the company was undervalued and well positioned for a move next year. The stock rose 7% over the course of the day. That's not an insubstantial move, so it's easy to see how an outsider might think, "Hey, those guys just said something and pushed that stock up. Maybe they're pocketing a profit."

Fair enough. Let's look at the list and see which other companies experienced a big move... None of them. Western Digital (NASDAQ: WDC  ) was the second-biggest gainer, up 2.3%. Two of the stocks actually lost value on the day.

So let's play devil's advocate and think about what News Corp. would have had to do in order to make some money. For the sake of argument, let's arbitrarily say that after an acceptable period of time, Barnes & Noble is up 10%, four of the stocks are up 5%, four are unmoved, and one drops 5%.

So News Corp. buys the stocks before the announcement, makes the announcement, and then holds on for a week to turn their profit. Of course, if you want to move the market, you need to weigh the risks that go along with doing so in order to figure out how much to invest -- no one robs a bank trying to get $3.50.

Luckily for our theoretical fraudster, the SEC has had a hard time prosecuting people for "pump and dump" scenarios. And recent efforts have focused on penny stocks, not the big boys that most people seem to think are the target of these media-led campaigns. The settlements that the SEC reaches seem to be a fraction of the gains made, so maybe the risk isn't that high.

So let's just try to add some money to the top line. The risk seems slim, the rewards could be huge, and all we have to do is convince 100 or so people to ignore their journalistic integrity, break a few federal laws, and look the other way so that we can make a bit more money in a venture that's not part of our core business. How hard could that be?

Logistics
So again, let's arbitrarily decide that we want to add 0.5% to one quarter's income, which is meaningful, but not so much that people would suddenly get suspicious. For News Corp., that means making a mere $41 million on this trade. So working backward, how much stock do we need to buy before we put out this article? Well, there's a bit more math than normal involved, but here are the important points.

  1. We need to buy a roughly equal value of each stock ahead of time for our basket, because we don't know which ones are going to pop. Using Apple as the baseline because its share price is the highest, we'll buy one share of Apple, and then spend roughly $500 buying whole shares of the other companies in the list. The total basket costs about $4,900.
  2. Each instance gives us $125 in income for our $4,900 investment.
  3. To make our $41 million, we need to buy the basket 330,000 times.
  4. That would require an outlay of $1.6 billion.

What a great plan! We end up with 12.2 million shares of Barnes & Noble, which would give us about as many shares as the top four institutional holders all put together, and require that we announce our purchase to the SEC.

Let's review
So to make any meaningful money, it looks like we would need to invest a ludicrously large sum of cash, break a half-dozen SEC rules, bribe a huge swath of employees and traders, get lucky on stock movements, and somehow avoid detection even though we're the trading equivalent of a live llama at a dinner party. That just isn't going to happen.

I don't think News Corp. is trying to manipulate the market for financial gain. No major publication is, and no sane blogger would. As it turns out, the reason the stock market is at all stable is that there are all kinds of barriers in the way to stop people from moving the market. The only dangerous ground we tread on is in the land of penny stocks. As fellow Fool Morgan Housel recently wrote, "Time-saving tip: Instead of trading penny stocks, just light your money on fire." Check out his 50 Unfortunate Truths About Investing for 49 more little insights, and don't worry, he's not trying to move the market.

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Read/Post Comments (9) | Recommend This Article (2)

Comments from our Foolish Readers

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  • Report this Comment On December 13, 2012, at 6:00 PM, kaslee wrote:

    Don't agree with the scenario you presented. Even a novice would know which stocks will show a move when the report comes out. That's the stock news corp would buy and dump later (Barnes and Nobles in this case) . Rest of the stocks are there just fillings to make it look like a report.

    I have observed Motley fool doing it often although without any results since nobody trusts them and their analysis anyways.

  • Report this Comment On December 13, 2012, at 7:35 PM, TMFRedRam wrote:

    Thanks for reading, and for insulting me and my company.

    So you're telling me that they knew BKS was going to jump, and put money only into it? Making a dollar fifty or so a share? So then News Corp (or the Fool, whoever) bought something like 30 million shares to add 0.5% to their top line?

    That sounds like an excellent plan. Why wouldn't more people do it? I think you nailed this one.

  • Report this Comment On December 13, 2012, at 8:58 PM, monev60 wrote:

    I don't know why the Foolish guys spend so much time bashing BKS. May be you should cover your short position, because BKS is about to skyrocket. Just wait until we get the numbers from after xmas sales.

  • Report this Comment On December 13, 2012, at 10:33 PM, TMFRedRam wrote:

    Thanks for reading.

    I hope I didn't come off as bashing BKS at all, I think it's a fine company - I used to work for BKS back in 2007. Good discount for employees and I like the Nook.

    Cheers, Andrew

  • Report this Comment On December 13, 2012, at 11:51 PM, kaslee wrote:

    i wasn't trying to insult you but the case you presented to prove manipulation doesn't exist was baseless. you would have to do better than just making it a probability and sum of averages problem

    and to answer you question yes if I had billions of dollars like GS and others I would sure as hell be a party to this pump and dump strategy because as cramer said its very profitable and LEGAL.

    I have learnt my lesson the hard way to not to listen to any investment advice from analysts voicing their opinion on air or a public forum. They are all just trying to dump their problem and make it my problem.

    Since then its been going good. I have been making 15-20% returns on my investments on a consistent basis, so weather I have nailed it or not is besides the point but the formula works.

  • Report this Comment On December 14, 2012, at 3:20 AM, TMFRedRam wrote:

    I appreciate that you didn't mean real harm. To make my point clearer, here. I'm talking about media outlets. What big trading firms do is a very different matter.

    I have no love for the manipulation of the market by banks, and it does happen. Penny stocks are also easy picking for pumping and dumping. But for News Corp, the Motley Fool, WSJ, the Times, etc. it simply does not make sense.

    Well done on the returns! It's a hard battle to fight, but it looks like you're winning.

    In summary, I think we agree (hopefully) that pump and dump does happen in some settings, but that for general media corporations and big stocks, it simply doesn't make sense.

    Cheers, Andrew

  • Report this Comment On December 14, 2012, at 9:36 AM, Pete1212 wrote:

    It's not nearly as complex as you make it sound.

    1) Buy a stock.

    2) Have a trusted analyst say positive things about it.

    3) Stock price goes up as you pointed out in your scenario.

    4) Sell

    How hard could that be? And don't tell me you don't know it happens routinely.

  • Report this Comment On December 14, 2012, at 12:32 PM, kaslee wrote:

    I agree what pete said, Big firms hiring/paying media outlets to publish favorable analysis on a particular stock for monetary gains.

  • Report this Comment On December 14, 2012, at 1:46 PM, TMFRedRam wrote:

    I still don't think it makes sense for a media outlet. They couldn't possibly be compensated enough for taking on the risk of being prosecuted by the SEC. If you're big enough to move the market by publishing a list or making a recommendation, then the fee any bank would pay you is meaningless.

    I only see three realistic market moving scenarios:

    1) Penny stocks, pump, dump

    2) Bank investment, hype from same bank analysts (this is closest to what you all have suggested, but it's much easier to understand from an internal perspective).

    3) One guy who can move the market making money off his own recommendations (not saying that anyone does this but someone like Buffett, Einhord, Cramer, etc.)

    Involving a company big enough to make a difference makes no sense to any of the parties.

    Cheers, Andrew

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