Smells like a bear raid

Trading data suggest 2007 effort to manipulate market

Two extraordinarily large trading days for Citigroup shares in the fall of 2007 hint that someone may have been manipulating the stock, say analysts who mine financial data using powerful computers and mathematical algorithms.

Researchers from the New England Complex Systems Institute in Cambridge, Mass., were examining stock trading data for the period January 2007 to January 2009 when they noticed two unusually large spikes in volume and other measures related to Citigroup shares. On November 1, 2007, the team noted, the number of borrowed Citigroup shares jumped by 100 million, reaching a value of almost $6 billion. Six days later, a similar number of borrowed shares were returned on a single day, the team reports online December 14 at The estimated gain for the investors who made the transactions was at least $640 million.

Such extreme events would be expected only once in a few hundred years, says Yaneer Bar-Yam, coauthor of the work. The likelihood of seeing those events six days apart is once in 4 billion years, the researchers’ calculations show. This suggests to Bar-Yam and his colleagues that the stock was being manipulated to artificially drive down Citigroup’s stock price. 

The researchers were investigating short selling, whereby an investor borrows shares and sells them immediately, with the promise to buy them back at a later date to repay the loan. If the stock’s price drops between the transactions, the borrower will make a profit.

Selling short can benefit the market by providing a check on overvalued stocks. But traders can also conspire to sell short with the intent of forcing a stock price down artificially. Such a move, known as a bear raid, is considered market manipulation.

Other researchers aren’t so certain that manipulation was at play. The analysis is an interesting case study, says financial economist Ekkehart Boehmer of the EDHEC Business School in Nice, France. But if the Citigroup trades were truly manipulative, the price should have gone back up after the deal was done.

It didn’t. Citigroup’s price kept falling. In fact, Boehmer says the traders would have made 10 times the money by waiting another two months to sell. “We can’t rule out manipulation, but we don’t have evidence of it either,” says Boehmer, who was director of research at the New York Stock Exchange from 2001 to 2003.

Regulations like the uptick rule, which allowed borrowed shares to be sold only when their price was higher than the immediately preceding price, or on the uptick, would have prevented the Citigroup transactions, notes Bar-Yam.

The Securities and Exchange Commission repealed the uptick rule in July 2007. It had been established in 1938 to prevent the massive declines in stock value that can occur when investors pool their resources and intentionally sell short to drive down a stock’s price.

Currently a version of the rule applies only to stocks that have dropped more than 10 percent in one day. This “uptick light” wouldn’t have limited the trading of Citigroup, since its November 2007 price declines measured only 9 percent.

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