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The Chairman
Victor Niederhoffer

11/18/2004
Vestiges of Jesse Livermore

Lately, the movement of many stocks reminds me of the kind of pool syndicates that the operators of Old Drew and Livermore liked to run. First a big down, and bad news as the weak hands liquidate and strong hands take over. And then a run up as the news filtering out is not that bad. Two stocks I own that I don't know if they are good or not are Pfizer and Chiron; and I don't know anything about what they do, but it makes me want to go to my library of old books and read the "Magazine of Wall Street" circa 1910 or "50 years on Wall Street" et al.

11/18/04 A Sage replies: First, I'll agree with the chair that things do have a Wyckoffian cast these days.

David asks: "What is the modern day form of a "pool syndicate"? Can one exist today? ...it would not surprise me if they do exist as I see what appears to be manipulation at times. Do market makers work together at times?"

Now there is an interesting question. I'll guess that E would say that the herd instinct amongst hedge funds was creating virtual pool operations and he was anxiously awaiting an opportunity on the other side. Well, at lest that's what I would say. (Wyckoff spoke of the "composite operator" in this context.)

11/18/04 James Sogi continues: The modern day version could be the internet chat room. Let's say there is a group of operators who are all on line together and one says, " I'm buying xyz". If 500 others jump in together with 100 lots each, XYZ moves. The 'public' sees this 'break out' and jumps in and the stock takes off on a run. In the meantime, the operators quietly distribute their shares, on high volume resulting in a flat congestion pattern.

There was a case of a high school kid that was indicted for pump and dump online using small illiquid issues on online forums and chat rooms. Livermore and other trust operators back in the day made the other operators put their stock into a trust to avoid front running each other. JD Rockefeller had large trusts with irrevocable power voting the shares of many companies, hence the 'Anti Trust ' law.

But there lies the difference. In the modern-day version there is no prior understanding or scheme. It is just communication or education which is not illegal. It is the preformed understanding, or scheme that would be suspect. (usual disclaimers of course blah blah etc etc)

Other areas of interest to Spitzerian types might be the sell side operations that were discussed earlier. If a sell side operator had large blocks from more than one operator and used that block to manipulate the market, even presumably for a few ticks, that might constitute a problem, but I am not familiar with the details of those types of operations. As always, there are many ways to skin a cat.

11/22/04 Ken Wasserman offers:

I have seen pools in the penny stocks and they can generate enormous gains if the ingredients are there.

First, you need a real business.

Second, you need a tight float.

Third, you need the stock to have been beaten down and forgotten.

Fourth, the stock is accumulated by those who can then bring others into the play through the message boards, particularly on Raging Bull.

Fifth, the company has a big story with seemingly unlimited potential and press release after press release is issued to bring the message home that the business plan is being carried out. It is key that the company not be tethered to earnings or assets, just carrying out the packaging of the business plan.

The game can end badly if either one of two things happen. First, the business plan stalls. Most do, so the game tends to be short lived. Second, even if the business has a big sky quality, if the managements' interests are not aligned with the shareholders.

This takes two forms. First, management is in cahoots with death spiral convertible debenture holders, thus creating the motive to crashing the pps to allow the debenture holders to convert at the lowest pps possible. The second trap is the company dilutes the stock to death with S8's and the like. The gains can be astronomical, very much like a cheap option right before expiration can balloon with the right news. The losses can be catastrophic also. It is of key importance that the float be controlled. If that is done, then only the market makers need to be dealt with in terms of curtailing or making them pay for naked shorting. Another chapter for another day.

11/18/04 Russell Sears adds: Even the press has caught onto the "pump and dump". "The greater fool theory", had analyst assurance that you wouldn't be a "bag holder".

All this reminds me of an old Shirley Temple movie, believe it was "Twinkle Toes". My girls and I was watching couple weeks ago where her guardian fell for the staged con. Shirley's Guardian and a well dressed chap overhear a deal being made for "Napoleon's antique watch". The second man offers to double the selling price, as he must have that watch. The buyer makes clear it is no longer for sale. Shirley's guardian is promised a fat profit if he can just get him that watch. Upon purchase and offering, the buyer feigns insanity through grandiose delusion.

However, the new game is "slander and slump". The scam seems to works by preying on our cultural cynicism, the evils of corporations, lawsuits at the drop of a hat and by the 2nd level deception presumption of unbiasedness, by the individual journalist uttering statement "does not trade in stocks..". After all isn't it a given that the media is the sole champion for the little guy in our society. Here's one mans battle against this.

While I offer no evidence beyond circumstance, such orchestrated predictable volatility from yellow journalism seems hard to imagine it is all solely for the best interest of the reader.

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