Complex Systems Institute claims "bear raid" market manipulation crashed the global economy

A paper from the New England Complex Systems Institute claims that they have found evidence that traders executed a "bear raid" on Citigroup in 2007, precipitating the financial collapse. A "bear raid" is a market manipulation technique in which short sellers conspire to dump huge quantities of borrowed shares into the market all at once, driving the price down (short selling is a stock-trading technique in which shares are borrowed for sale; the short seller makes money when the value of the borrowed shares declines).

"Bear raids" have been considered a risk to markets since the Great Depression, and a financial regulation called the "uptick rule" was instituted in 1938 to prevent the tactic. The uptick rule was repealed in in July, 2007, and the alleged bear raid took place in November, 2007.

On November 1, 2007, Citigroup experienced large spikes in short selling and trading volume. The number of borrowed shares—short interest—increased by approximately 130 million shares to 3.8 times the 3-month moving average. The total trading volume jumped from 73 million shares on the previous day to 171 million shares, 3.7 times the 3-month moving average. The ratio of the increase in short positions to volume was 0.77. This is the fraction of the total trading that day that may be attributed to short positions held until market closing. The total value of shares borrowed on November 1 was approximately $6.07 billion. Adjusted for the dividend issued on November 1, 2007, Citigroup stock closed on November 1 down $2.85 from the previous day, a drop of 6.9%.

The number of positions closed on November 7, 202 million, was 53% larger than the number opened on November 1. The short interest before the increase on November 1 and after November 7 are virtually identical, the larger decrease corresponding to an additional increase in short interest between these dates. The mirror image one-day anomalies in short interest change suggest that the two are linked. 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.

Evidence of market manipulation in the financial crisis (PDF) (Thanks, Dan!)


  1. A news article of this gravity should be airing all over CNN and the news media! 
    It’s horrendous and very frightening.

    BB does it again.   Thank you for the post.

    1. The chances of this being seriously discussed in what passes for news media in the US is about as likely as the chance that anyone will ever be accused, charged or prosecuted for this.

  2. Sort of like saying a discarded cigarette set off the blaze in the national greasy rag and kindling wood repository.

    1. Funny, but more like a guy hijacking a milk delivery truck, dumping 3/4, delivering the other 1/4 at a jacked up price and sparking a run on the markets due to the “shortage”.

    2. I was thinking more along the lines of finding the straw that broke the camel’s back.  Crises are often triggered by such activities but unless the situation was already on the edge they couldn’t be nudged over it.

      Furthermore, even if you stop them you won’t avert the problem, just delay it a bit.  Things will get more and more unstable until a butterfly comes along and knocks it down.

  3. Huh. On 11/5/07 Ron Paul raised more money than any other candidate had in a single day.  Online too.

    Funny coincidence.

      1. A bullet doesn’t start a war. But, a shot heard round the world may.  The system was still broken, but such things could well have caused it to actually collapse. Just as saying that a bank is going to crash may well cause a bank to crash. And if that bank is somehow tied into the entire market it may well cause the market to crash.

        Things were just tied together too much, if the reduction in house prices in Nevada can cause businesses in China to go bankrupt, the system has problems. They are still like this. Dodd Frank isn’t implemented and all the provisions that seek to avoid this in the future are just floating out there without the rules actually being set down.

        1. I think it’s that too few people own too much, and they suck at it every bit as much as everyone else does. All the concentration of wealth does is concentrate the damage when the mega-owners suddenly screw something up. Buy local.

  4. I’m a finance novice. Any economists out there want to explain to me how the “uptick rule” is supposed to prevent a bear raid? From what I understand, the uptick rule only places restrictions on when short sales can be made. Couldn’t short sellers just wait until the stock price was in an uptick and then execute a bear raid?

    1. IANAEconomist, but…

      The point of short selling is to have the value go down. If the market is moving upward, you’d have to dump a large number of shares to counteract that upward momentum. If the shares don’t actually drop in value, but merely gain value at a lower rate because of the supply increase, you lose money and other people get valuable shares for cheap.

      I’d imagine in some situations selling large numbers of shares actually just might INCREASE their value – demand will of course drop from the supply suddenly rising, but if the shares have been trending upward people might see the sudden increase in supply as a chance to make a lot of money (assuming the upward trend will continue) and they simply buy up all the new shares at what seems like bargain rates, which boosts the demand again.

      Amazing, isn’t it? We have a system that is built on greed, with the fundamental flaw of CONSTANTLY REQUIRING expansion (which is impossible and unsustainable), and then we are baffled when it results in cutthroat policies being the order of the day and short term personal gain trumping longterm societal health.

      Corporations, man.

      1. I got it. The rule does not make a bear raid impossible or unprofitable, it just makes less likely. (You’d have to get a TON of people involved and dump a large enough volume to counter the upward momentum, and time it right so that other investors think the price dip indicates an actual decrease in value and sell their shares in a panic.) 

      2. Constant expansion is not impossible and unsustainable if productivity and population/demand/profits/gdp continue to increase, which they have for well over a century- hence the stock market (DJIA) has risen from approx. 300 after great depression to 12,000 today. You would have to think that is an 80 year statistical fluke to accept your statement.

        1. This Earth, and the physical resources on it, is finite. Continuous expansion is unsustainable unless you start exploiting resources outside our atmosphere.

          The derivatives markets were and still are ‘worth’ many times more than the sum value of the planet’s natural resources. It only has virtual value; there is no way of materially “paying out” every cent that supposedly exists in the global economy.

          1. First of all derivative markets are essentially neutral in value….the market itself is acting as an intermidiary between longs and shorts.

            As for the earth and its physical resources being limited, that is offset by the increase in productivity resulting in more efficient use of such resources (hybrid engines, solar panels, eventual fusion/free energy. bio-engineered food). Also most population forecasts show a leveling off after 10 billion. Nobody knows the ultimate outcome in terms of which side of the equation wins out…abundance or dearth.

            Thomas Malthus and Paul Ehrlich had most of us dead by now, by similar logic as you are displaying.

            And please note that solar power is a way of exploiting resources from outside our atmosphere….

        2. 80 years is not a particularly long period of time when measuring sustainability.

          There are physical limits which will eventually be reached, if we haven’t already.

          1. coal and oil are also extra-terrestrial in the sense that plants, through photosynthesis, grew and then died and rotted, forming oil/coal

  5. A thousand thanks for mentioning this, Cory!

    Although, seriously, it should be obvious to one and all by this time that bear raids were conducted on Lehman Bros., Bear Stearns, WaMu, etc., although that is not to say these firms weren’t also criminally culpable (Lehman’s creation of R3 Partners, staffed with their own people to illegally hide billions in debt as a hedge fund, etc.).

    Again, everyone, a true citizen hopes, has read the valuable Financial Crisis Inquiry Commission report, right?
    And understands that these activities, as posted today by Cory, are part and parcel of an overall plan?

    Look at p. 76 of the pdf report (p. 48 in printed version), to note this important factoid:

    “The CFMA effectively shielded OTC derivatives from virtually all regulation or oversight. Subsequently, other laws enabled the expansion of the market. For example, under a 2005 amendment to the bankruptcy laws, derivatives counterparties were given the advantage over other creditors of being able to immediately terminate their contracts and seize collateral at the time of bankruptcy.

    In other words, an amendment which clearly should have no place in a bankruptcy law, but because it was written in conjunction with those endless predatory lending schema — selling off mortgages, securitizing them to infinity, then passing said bankruptcy law in 2005 to be sure the bankster would recover, along with said amendment guaranteeing they would.

    JPMorgan Chase created mortgage/securitization/recovery model:

    Sell the mortgage, any way possible.  After you crash the economy, illegally foreclose with filing of false affidavits (robo-signing), recover 90% of original funds if FHA loan, then re-sell or auction off homes again, thusly tripling profits, but counting all that securitized debt you, the bankster, sold, in reality making ten-fold or greater in profits.

    1. The level of evil genius involved is impressive. It seems like magic as their invisible hand picks your pocket because they designed a money making machine from parts so complicated they each require expert knowledge to understand. Late capitalism is sufficiently advanced.

        1. In a better nation, the hammer of justice would  remind the invisible hand what happens when things get crooked. Unfortunately, it seems America lost its hammer a long time ago so we’re gonna have to go all MacGuyver on this shit and improvise with whatever broken junk we can find laying around… We need to find something hard and heavy, after that just start swinging!

          1. uh, the invisible hand has the hammer.

            We really should have built more of a rock/paper/scissors system. Eh, maybe next time.

  6. This is very interesting. Is there any connection between the repeal of the rule prohibiting this form of market manipulation and the banksters behind the bear raids? Did the banksters play any role in getting that rule repealed? Did they pay anyone involved in the decision or exert any other forms of influence?
    If so, isn’t that still a crime? (e.g. bribery, extortion, criminal conspiracy).

  7. A deregulated financial market that both bets on and impacts the economy is like giving sport betters the opportunity to break the knees of the players/teams they bet on.

    As a result, we need the financial market to either be a free-for-all casino that is 100% firewalled from the rest of the economy (which would remove almost all of the money from it), or an integrated economic function that is highly, highly regulated.

    Fat chance we are going to get either though…

    1. A deregulated financial market that both bets on and impacts the economy …
      I’m not sure that first part is correct, excepting for that thieving moron, Jon Corzine, who may be one of the few who actually did bet on the sovereign debt, etc.

      You see, when hedge funds give out loans to specific corporations, they first read their books, next they speculate based upon the data gathered, so there is hardly any real “betting” occurring.

      Also, since the top banksters also own their very own hedge funds (JP Morgan Asset Management was thought to be the largest hedge fund in 2007, and guess who owns them  — of course, JP Morgan Chase!) and such info is passed back and forther, further negating any real “betting” taking place.

      Now, that so-called financial reform, Dodd-Frank, was supposed to alter this (relationships between banskters and the hedge funds they own) but the change was a simple paper change, which probably changed nothing!

      There should be an end to speculation, especially ultra-leveraged speculation thanks to those fraudster schemes of securitizations/credit derivatives and naked swaps.

      And the re-introduction of the financial transaction tax (ended during the Johnson administration back in 1966).

      1. I don’t think I understand. Maybe we’re just using terminology differently.

        To me, speculation is inherently a “bet” – the spending of money on the acquisition of an object for the sole purpose of reselling it at a later date and, therefore, for the sole reason of a calculated expectation of a rise in the market price. So, the betting on “red” in a roulette wheel is a contract bought in the calculated expectation of a price appreciation if the ball lands on red (effectively, the house buys back the contract via your payout), and the betting on GE stock is likewise a bet on the contract’s price appreciation. Of course, asset trading in a speculator-dominated market is a very special kind of bet in that it is a persistent circular loop between betters (so no fixed ‘house’ and no fixed payout event), but that is a separate problem.

        Thus, to me, the only way in which an asset purchase can not be a bet, is if the value of the asset is predominantly derived from something other than its expected value change at resale. E.g. I am hungry, so I buy a potato and eat it, deriving its value from its ability to relieve my hunger.

  8. A few people shorting Citigroup crashed the global economy?  To be honest, I think the housing bubble (caused by the imbalance of trade between east and west, leading to easy credit in the west, aided and abetted by negligent supervisors) crashed the economy.

    1. Yup…and amplified by the fraud perpetraded by ALL the market participants….home buyers overstating income, appraisers, mortgage brokers, and investment banks with securitizations.

  9. Is this supposed to be the Bear Wednesday article? Because it is severely lacking in fun bear mentions/pics/meme material.

    1. I would be satisfied with the culprits of the article’s bear raids being put in a cage with hungry bears. Memes and so on can come later.

        1. Depending on the zoo, there are many ‘common’ least-endangered species in zoos for the spectacle of homg I’ve never left North America but lookit the giraffe!

          As long as they get eaten, I’m not too picky on the methodology.

          Attention law agencies: S-A-R-C-A-S-M. S-A-T-I-R-E. Not D-E-A-T-H–T-H-R-E-A-T-S.

  10. The study doesn’t claim that the bear raid caused the crash. It says additional investigation is warranted. Boingboing misquoted the study. Way to go BoingBoing, and every other clutz who didn’t bother to read the pdf file. 

  11. Why wasn’t this flagged by some computer somewhere at the time and investigated further? Don’t we have a whole host of securities industry regulators whose job is to catch shenanigans like this?

  12. I get the scam. But how many traders would it take?  How many of those traders have managed not to talk.  How have 100% of them  deleted every email, text, chat and phone log.  They had to communicate somehow, this could not have been done otherwise. 

    1. Just 1, with a seat and market-making leverage.

      You don’t even need to ever own an actual share – naked shorts can be used to hammer down a stock at will. In some cases many multiples of the actual distributed shares of a company are offered at once, lower and lower and lower with immediate callbacks of the offer.

      It’s why so many would like to see a return of the uptick rule.

      Here’s the first part of “Phantom Shares” – a special about the practice:

  13. A “Ton” of people is not needed, just a few colluders with deep pockets. They typically do their deeds at critical technical junctures.
     They create false breakouts where buyers rush in after a stock breaks up and out of a formation only to be met with relentless short selling supply. They keep selling to push it back into the formation. This false breakout then causes others, who see it as a bearish signal, to dump their shares.

     In the Citi example here, they supplied enough shares to send the price below a lower trend line (a “bottom” if you will) thus causing a break down and a sell off by people watching the charts.

    When I went back to look at a chart from back then, it shows the takedown actually started a month earlier a few months after the  bottom was “tested” a few times.

     In November , the stock was actually already falling when somebody piled on with the volume shown here. (A current chart shows a price ten times higher than the one in this article due to a 10 to 1 reverse stock split.)

     Short selling should be totally banned. It serves no good purpose and don’t tell me about added market liquidity when at least half the short selling is with counterfeit shares (naked short selling.)

     I say if you don’t like a company, don’t buy its stock.  Leave it to normal supply and demand to sort out its true worth.

    1. I say if you don’t like a company, don’t buy its stock. Leave it to normal supply and demand to sort out its true worth.

      “Liking” a company is an odd way of describing an investment. Stock price doesn’t have much to do with whether a company is good or bad, just whether it’s perceived as a good investment or not. Lots of despicable things are highly profitable.

  14. I’m still trying to wrap my head around Yves Smith’s explanation of how the Magnetar hedge fund ( ; ) found a way to use the initial high-interest payments for the worst tranches of subprime bonds to make bets shorting that market. They ultimately made this bet so many times, buying up the narrow subprime bits nobody wanted, that “Magnetar drove the demand for at least 35%, perhaps as much as 60%, of the subprime bonds issued in 2006” [Econned 260]. The market they were shorting was also freshly deregulated. Or something. When I try to write up my takeaways from Smith’s wonderfully succinct prose, I always err.

  15. For every seller, there has to be a buyer, I just don’t see short selling as a problem, it allows pension funds to lend stock out they were going to hold anyway and get a bit more of a return on it.

    1. The intelligence quotient on BB has been dropping of late

      Coming from a new commenter, that’s like when your mother calls you a son of a bitch.

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