esg smashed? computerised trading explained

Hi All

I thought id type up a very 'laymans' description of how these computerised trading systems work, and why ESG has been so badly smashed over the past week.

Contrary to popular belief, many of of these systems dont hold massive open shorts due to risk. They do hold various open shorts that vary in size depending on the price action/volume in the stock, but its the constant trading by these systems with downward pressure that eventually wins out and forces normal investors to add to the downward pressure.

Anyway, hope the below makes sense, and you judge for yourself as to whether they are legitimate / legal?

Ok so a hedge fund borrows significant amount of stock, then they stack the sell side to make the overall stock sells outweigh the buys significantly, then the system goes to work.

They generally work by creating their own downtrend by putting downward pressure on the share, and then their overall net short becomes very profitable as the trend continues.

eg.

If the bid is 80 and the offer 80.5, they might sell 1000 shares at 80 in individual trades, few seconds apart. But they have small numerous buy orders sitting at 79.5. So "ordinary" shareholders / traders etc etc, they are forced to sell at 79.5. Then the start stacking the sell at 80. Then the process continues - as soon as it sells at 79, they will load offer at 79.5 and so on.

If someone buys all the stock back up to 70, the just continue to place more and more stock there until the buying runs out, and then the computer continues again pushing down with these microtrades, and overall stacked sell side, normally just out of the buy zone to minimise risk.

Once the trend builds, and the market price moves further away from its stacked sell size, the risk is reduced for the fund, as its normally self perpetuating from here.

In the current ESG downward trend, the computerised trading started at 80.5. I'm watching it now and it's currently 65.5.

At various times you can see what looks like traders go in and buy stock... but the computerised selling just continues/increases, then when the trend continues, the traders stops are triggered which is where the stock gaps down... but of course the computer LOVES this coz it's net short position just gets more profitable, and it moves its selling down again to stack the offer side lower. AND THE COMPUTER SYSTEM DIDNT ACTUALLY SMASH THE STOCK, it was the shorts being tripped by others. (This is where I believe they are made to be legal... arguably anyway).

The more people that sell their shares to get out, the better the net downward pressure is without the computer needing to do it. Also, the more resistance it gets, (eg, if the buying stacks up like it did at 70) it just loads up bigger short positions coz they have millions of shares in their kitty to short if need be, and eventually the buying is exhausted, as these buyers are normally traders or M&D investors with comparatively short pockets. When the trend continues and investors start seeing enough losses or triggers stops they will sell creating more downward pressure without the system needing to do it, and of course every time this happens it close some of the short positions out at significant profit for the system.

These systems work on an overall net short position, but the micro-trading between the bid/ask in various qty's ensure they are making very small margins every trade, and the program "wins" an average of 70 % of trades. So it's the combination of overall net short from 80c and the micro-trading that results in a huge windfall.

They also use the beginning/end of day match ups to square positions/take profits/setup for the next day.

The only way the software can be "beaten" is if there's enough buying pressure, and the system ends up in a situation where it's sold too many shares, and the stock is running - this would trigger an alert in the system and tell it to start net buying and minimise risk. In this case if the rumours are true, someone would have to buy in excess of probably 8-10million shares from the hedge. The only time it's remotely possible is at the start if the process, when the market price is remotely close to the massive stacked sells.eg check the 1,000,000 sell orders at 80 and 82c. and the 500,000 at 75.

It couldn't happen now, as the market price is too far away from the stacked sells and the trend has become self perpetuating. If it were tried now, you'd have to buy 3mill shares before you even got close to the first big order at 80c, and the computer system, which probably has another 10,000,000 shares at its disposal to short if required will just increase its short volumes until the buying is exhausted, then creating a MASSIVE stop loss trigger.

Loads of funds and hedge operators have their own proprietary systems, but this is really how they work. Market manipulation and misuse of market power/deep pockets? JUDGE FOR YOURSELF.

The good news is at some point the computer needs to stop. So keep your eyes open for a sharp price turnaround followed by the removal of the massive stacked sell side... this is when it could run again. BUT ALSO BEWARE, as the computer may just be looking for traders to leverage up before it starts again, triggering stops and more downward trends.

I have a complaint into the ASX surveillance dept and suggest you do to. You can fill in a form here: https://myasx.asx.com.au/home/feedback.do

Unfortunately these system operators play in a grey space legally and its very difficult to prove any wrong doing because once the trend is started, its often self perpetuating. But I can tell you, if it was an ordinary investor/trader like most on this forum doing it, then wed be a whole different situation one would think!

Hope the above makes sense.
Rexi98.
P.S - this current computerised 'manipulation' started at 80.5, and on todays close of 66.5 is a 17.4% drop in the past week.