Manipulation of Trading Information. A better explanation about the manipulated trading that occurrs. Here is an SEC article from a market maker that explains the happenings.
Lets look at a few examples, and please note that the side of the trade is inverted depending upon the market participants "point of view." When a Market Maker buys from the general public, it's the same as an investor sell, it is recorded as an ACT system buy or "B". When a Market Maker sells to the General public, which is the same as an investor buy, it is recorded as an ACT system sell or "S". So the Market Makers report both buys and sells to the general public.
Unfortunately here is where the rules change to the detriment of the average investor: A Market Maker to Market Maker transaction is recorded solely on the sell side as an "S", not on the buy "B" side. If a Market Maker buys from another Market Maker, it is not recorded in the ACT system as a "B", it is only the selling Market Maker that reports it. This is the core reason that it appears in the real time price stream for OTCBB stocks that a bid:ask ratio of greater than 1:3 is often required in order for prices to move up, since a Market Maker to Market Maker transaction represents no change in the supply demand equilibrium of a stock. The excess over 1:1 is Market Makers trading with
each other.
All sorts of technical accumulation/distribution models use volume in their calculations, and this churn game where Market Makers sell to each other can be used to manipulate the buying and selling of many who use such technical models in their trading. These types of churn trades are all but impossible to discern from retail trades and to my knowledge are currently completely impossible to discern in real-time. The Market Makers combine this "churn" trading with artificial price walk downs and naked shorting, and you have the potential of complete Market Maker Manipulation of the whole price and volume chart. This would be exceedingly profitable to conspirators at critical technical junctures such as the apex of triangles and quiet, pre-breakout trading ranges to make it appear that the order flow is going opposite to the "real" order flow.
Why are MarketMaker's allowed to report these churn trades (Market Maker to Market Maker) as volume, since supposedly a Market Maker is only concerned with "making a market?" There is no legitimate need for volume figures reported in real time price streams as well as end of day price reports to include Market Maker to Market Maker transactions. After all, who is the market being made for? Another Market Maker?
