The Manipulations People Play

Markets are a zero-sum trading game. Manipulators in the wholesale power market achieved their gains while adding no value. Their gains came at the expense of California residents. In a taped call in November 2000, two traders are heard laughing about fleecing "Grandma Millie" and "those poor grandmothers in California."

Slow to recognize the market manipulation in California, lawmakers finally slapped new regulations onto the wholesale power market, including price caps. The regulations were stress-tested by traders and regulatory holes were quickly found.

For example, power was routed out of California and back into the state in order to avoid price caps, since out-of-state power was not subject to price caps.

Plugging Holes Swiftly

All markets -- including the stock market --- are subject to attack, to stress tests of the regulatory framework. The key to mitigating damage rests on a rapid response. If those who are entrusted with oversight and enforcement respond quickly to plug regulatory holes, damage can be contained.

Microsoft (MSFT - commentary - Cramer's Take) will release its next-generation operating system in the coming months. As soon as the new operating system is released, hackers will stress test the system, looking for holes in the code that they can exploit to their advantage.

There is a huge difference between the reaction to holes in Microsoft's operating system and to regulatory holes in the stock market. Microsoft limits damage by fixing a hole as soon as it is identified. That doesn't happen in the stock market. In the face of clear and obvious market manipulation, regulatory repairs move at a glacial pace.

As traders did with the wholesale power market in California, certain market participants are manipulating the stock market by manipulating supply. They do it because it is immensely profitable. They do it because they can get away with it.

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At time of publication, Alsin and/or ACM was long Microsoft and Overstock, although holdings can change at any time.

Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor, and portfolio manager of The Turnaround Fund, a no-load mutual fund. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback; click here to send him an email.