Nerds on Wall Street: Math, Machines, and Wired Markets

11.5. How Communication Changes Market Manipulation

The world has changed a great deal since the late 1600s, but market manipulations do not go out of style. All that changes really are the details of how the rumors are spread and how bluffing is achieved. The key is communication technology, which allows more traders to be reached in less time.

The basic manipulations were largely unchanged from de la Vega's time. The coffeehouse of seventeenth-century Amsterdam was replaced with Harry's Bar or the Fraunces Tavern on Wall Street. Once again, to have an effect, the manipulator had to go from bar to bar repeating the rumors, as described in Edwin Lefèvre's classic Reminiscences of a Stock Operator concerning the trading of Jesse Livermore in the early twentieth century.

Newspapers, telephones, telegraphy, and television all allowed gullible players to be reached faster, and in greater numbers. There are numerous examples. For instance, the classic boiler room of Wall Street used the telephone to cold-call thousands of investors, much as the broker of de la Vega's time spread rumors in coffeehouses.

A good example is the story of the manipulation of Sea World stock when it was independently traded. Manipulators who were short the stock spread rumors using the telephone that Shamu—the orca star of the theme park—had taken ill, sending the stock plunging for a quick profit.

Print and TV allow portfolio managers to reach larger audiences, creating the incentives to pump stocks that ...