June 19, 2009
I have seen evidence that some very large investors are exploiting the market by using a two step strategy, which, while completely legal, disadvantages many investors in a particular stock.
They apparently buy large numbers of puts on a particular stock. Typically it is a very large cap stock (I first noticed it with Morgan Stanley). They than massively short sell the stock to drive the price down. They than take their profits on the puts. They than cover their short position. If they just shorted the stock to drive the price down, they would drive the price back up when they cover their shorts, and so, that would not regularly be profitable. But the use of puts prior to shorting, allows them to liquidate their profits prior to closing their shorts. It is hard to believe that this is now a completely legal strategy (of course usefull only to very deep pocket hedge funds), but it seems that it is. There must be something that can be done to protect investors from this unfortunate practice.
Thank you, Bill Kaufman