In trolling the usual academic sites I stumbled upon this release in ArXiv’s archive for the week:
Title: Evidence of market manipulation in the financial crisis.
The abstract is compelling enough:
We provide direct evidence of market manipulation at the beginning of the financial crisis in November 2007. The type of market manipulation, a “bear raid,” would have been prevented by a regulation that was repealed by the Securities and Exchange Commission in July 2007. The regulation, the uptick rule, was designed to prevent market manipulation and promote stability and was in force from 1938 as a key part of the government response to the 1928 market crash and its aftermath. On November 1, 2007, Citigroup experienced an unusual increase in trading volume and decrease in price. Our analysis of financial industry data shows that this decline coincided with an anomalous increase in borrowed shares, the selling of which would be a large fraction of the total trading volume. The selling of borrowed shares cannot be explained by news events as there is no corresponding increase in selling by share owners. A similar number of shares were returned on a single day six days later. The magnitude and coincidence of borrowing and returning of shares is evidence of a concerted effort to drive down Citigroup’s stock price and achieve a profit, i.e., a bear raid. Interpretations and analyses of financial markets should consider the possibility that the intentional actions of individual actors or coordinated groups can impact market behavior. Markets are not sufficiently transparent to reveal or prevent even major market manipulation events.
The takings of this “bear raid” on Citigroup?
We can conservatively estimate the total gain from short selling by multiplying the number of short positions opened on November 1 by the difference between the closing price on November 1 and closing price on November 7 ($4.82), which yields an estimated gain for the short sellers of $640 million.
It looks as though someone or multiple someones fucked the market for a cool 700 million. OUCH.
The authors note that had the financial rules protecting against this kind of shorting were repealed in July 2007. The data they present gives the lie to the claim that the crisis was precipitated by unseemly lenders and irresponsible borrowers:
Within the resulting deregulated environment, it is still widely believed that the crisis was caused by mortgage-related financial instruments and credit conditions, and that individual traders did not play a role [32–35]. Our analysis demonstrates that manipulation may have played a key role. Methods for detecting manipulation and its effects are necessary to both inform and enforce policy.