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How do large institutions manipulate the market by being bullish or bearish on a certain target?
In my member discussions, I regularly hold theme nominations, allowing members to choose the topics they want me to analyze in depth. For example, previous topics like on-site power supply and optical communication were popular issues chosen by vote.
And the topic of "how institutions manipulate the market" is actually mentioned from time to time.
This topic is full of mystery for many people, because in common perception, the stock market is full of countless "market makers" and "big players".
As retail investors, we seem to only be able to survive in the cracks, trying to peek into their market manipulation patterns to get a share of the pie.
First of all, I'm not saying that such blatant manipulation doesn't exist, but it mostly happens with extremely small-cap stocks or in emerging markets with imperfect regulatory systems.
In a mature financial system, especially when you are dealing with giant investment banks like Goldman Sachs and Morgan Stanley, the truth is often more complex and more "compliant" than conspiracy theories.
If you understand how a modern investment bank operates, you will understand that it is not a unified "monolithic block" with a single mind, but rather a business alliance with many internal factions, each operating independently.
Each department has its own independent P&L, KPI, and survival rules. The appearance of "singing bearish while secretly accumulating" is often not a unified conspiracy.
▋The First Great Wall: "Chinese Wall" and Drastically Different KPIs
To understand the behavior of investment banks, one must first understand this omnipresent yet crucial concept in the financial world — the "Chinese Wall."
This is not a physical wall, but a set of strict legal and compliance requirements designed to create an information barrier. It completely separates two core departments within an investment bank:
1. Research Department: The team of analysts we often see.
2. Trading Desk / Prop Desk: The department where the bank buys and sells using its own capital.
The law strictly prohibits any communication between these two departments regarding undisclosed market-sensitive information. But a deeper division stems from their drastically different KPIs:
— What is a research analyst's KPI?
It's the accuracy of their reports, their influence in the industry (e.g., being rated "best analyst" by institutional investors), and whether their reports can bring value to clients, thereby indirectly generating brokerage commission income.
His bonus is not directly related to the bank's proprietary trading profits. His goal is to become a respected, accurately predicting star analyst.
— What is a trader's KPI? Only one, simple and crude: P&L (Profit & Loss).
How much money was made today? How much money was made this quarter? His bonus is directly tied to trading profits.
He may not care about a company's long-term fundamental story; he only cares if current market fluctuations can create trading opportunities.
From the outside, the bank appears duplicitous. But internally, these are just two employees pursuing different KPIs, doing what is most beneficial for their own bonuses under their respective rules.
▋The Second Contradiction: I am the "Market Maker", but I am not my own master
Many times, data shows that a large institution is buying a stock, but this does not mean they are bullish on it.
One of the main reasons is the mechanical operation of hedging derivatives (Delta Hedging):
For example: an institution might have sold a "Call Option" on that stock to a large client.
Then, the trading department will buy the stock to hedge the risk.
The result is: publicly, their analysts are shouting "sell"; but operationally, their risk management system is mechanically buying stocks.
▋The Third Possibility: Mismatch in Time Dimensions
Analysts' "bearish calls" and the trading desk's "buying" may not be speaking in the same time dimension at all.
— Analysts: Their ratings may be based on performance over the next 6-12 months. A bearish report might say: "Due to supply chain issues and macro pressures, the company's earnings for the next two quarters will be very ugly." This is a short-term negative.
— Asset Management Department: The bank's asset management department, they consider a longer-term strategy. They might think: "Great, the market is selling off this quality company due to short-term bad news. This price is an excellent discount for our holdings over the next ten years."
▋Grey Area: Legal "Open Conspiracy"
When all departments focus on their own KPIs, sometimes a near-perfect synergy can arise, which is a legal "open conspiracy."
1. The asset management department wants to build a large position in a certain stock, but finds it too expensive. Their KPI requires them to build the position at a lower cost. They choose to wait patiently.
2. A few weeks later, the research department analyst independently completes their analysis, finds the stock overvalued, and to meet their report accuracy KPI, publishes a downgrade report.
3. The stock price drops 10% in response.
4. The asset management department's trading system monitors that the stock price has fallen into the preset "value zone," triggering a buy order, perfectly achieving the KPI of "low-cost position building."
Is this manipulation? Technically, no. Because there's no evidence of collusion. It's simply an accidental outcome within a large organization, where different departments pursuing their respective KPIs lead to a result that is most beneficial to the institution as a whole.
▋The Real Predators: Hedge Funds
If investment banks are sophisticated machines operating under strict regulations and internal contradictions, then hedge funds are a group of unfettered, purely goal-driven predators of the jungle.
They are largely unbound by the "Chinese Wall," and the core of their business model is to actively create and exploit market volatility. They are the true archetype of the "market maker" in the minds of retail investors.
— "Short first, then attack": Institutions like Hindenburg Research are prime examples. Their researchers are not driven by industry reputation, but directly serve the sole goal of profiting from short selling. Issuing reports is meant to crash the market, and crashing the market is meant to make short positions profitable.
— "Speaking for their own positions": When a fund manager appears on television, their statements are part of their trading strategy. Being bullish is to drive up prices for selling off, or to attract more attention to solidify an upward trend; being bearish is to intensify panic and maximize profits on their short positions. Every public appearance serves to actively manage their P&L.
▋Summary
Next time you see news about "big banks singing bearish while buying," don't rush to conclude that "market makers are manipulating."
You should, like a more professional investor, ask yourself a few deeper questions:
— Which department is buying? What is its KPI? Is it for short-term profit, long-term value, providing liquidity, or simply for risk control?
— What time dimension is the bearish report based on? Is this consistent with the investment horizon of the buying department?
— Or, is this not an investment bank full of internal checks and balances at all, but a hedge fund with a single goal and consistent actions executing its trading strategy?
Understanding the internal organizational structure, KPI-driven behavior, and conflicts of interest within these large institutions is far more important than searching for an elusive "market maker pattern."
- KP
p.s. This week's member voting topic was "Advanced Packaging." The report has been released and is extremely in-depth. If you are interested in this topic, consider becoming a member. After reading the article, you will have a completely different understanding of the subject.
