Spotting Manipulation in the Tape

By LucciStaff

By LucciStaff

If you’ve ever spent more then 10 minutes on social media, you have surely seen mentions of “manipulation”. It’s natural – we try to explain things we don’t understand, and, more often than not, we are wrong in what we think we are seeing. What is “manipulation”? How do you even spot it? Well, for us, it’s pretty easy to identify manipulation. All it takes is a keen eye, and a Time and Sales.

The easiest way to spot manipulation is when you match the size you see on your Level 2 with the transactions you see on your Time and Sales. It’s a common practice for institutions and large private traders to show more size on the Level 2 than they actually want to get hit. This is commonly called “Spoofing”, and is something that the SEC has just recently begun cracking down on. So how do we see if the L2 size is real? Well, check out the Time and Sales. If you saw an order for 1000 shares of $AAPL stock sitting on the ask at $109, and then that order suddenly disappears from the L2 -yet there are only 400 shares printed at $109 on your Time and Sales- then you know that size was fake. While this is by far the most common way we spot manipulation, it is by no means the only way.

Premarket Gaps are a nightmare. In fact, they can be so treacherous that I typically refuse to trade until 10 am, which is usually where trend action resumes and the gap is no longer a factor. The beauty of gaps is that they are something everyone can see. But how can you tell if the gap is fake? Well, take a look at the market in general. If the market gapped up, and the stock followed suit, it’s more than likely legitimate. If not, then you need to dig a littler deeper. If there was no news, then you know that you have some manipulation playing out in front of you. After all, Jim Kramer famously shed light on this practice years ago. As a result, we all know what to look for. That is, if you pay attention.

The most common form of manipulation that the retail community frequently falls victim to is known as a “fake out”. While you should already know what a fake out is, for those that don’t, a fake out is when the stock (or market) looks as if it is going to breakout to either the upside or downside. This is done to convince traders that they need to get into a directional position, or else they’ll will miss out on profit. After enough traders get into a directional position, the stock reverses it’s course and traps everyone who entered a breakout position on the wrong side of the trade. While breakouts find themselves successful around 25% of the time, the easiest way to protect yourself from a fake out lies within the tape.

When it comes to breakouts, the tape becomes much more active. Volume increases drastically, as does the frequency of trades coming into the market. If you don’t see things heating up, then more times than not you are going to witness a failed breakout. Also, if there are a significant amount of shares sitting on the ask for an upwards breakout, or the bid for a downwards breakout, then you are most likely witnessing someone exiting a position into the breakout. They could also be outright shorting the stock. Either way, the stock will reverse it’s course and drain options premium, along with forcing you to take the loss.

Although the SEC does it’s best to rid the market of manipulative techniques, traders have nevertheless become smarter. Manipulation is not as easy to spot as it once was, but if you stick to your strengths and utilize the Time and Sales/Level 2, then you will find that you are less likely to fall victim to manipulative practices.

(Image Credit: Alex Bikfalvi)

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