How did Jesse Livermore manipulate the market?

Jesse Livermore, a legendary figure in trading history, manipulated the market primarily through cunning strategies that exploited the mechanics of thinly traded stocks and the operations of bucket shops during his early career.

Jesse Livermore's Early Manipulation Scheme: The Bucket Shop Stratagem

In his formative years, Jesse Livermore gained significant profits by leveraging the operations of "bucket shops." These establishments were essentially unofficial betting parlors where patrons could place wagers on stock price movements without any actual shares being bought or sold on a real stock exchange. Bucket shops effectively acted as bookmakers, betting against their own customers.

The Mechanics of His Devious Method

Livermore's approach to manipulating the market via bucket shops was systematic and highly effective for its time:

1. Targeting Thinly Traded Stocks: Livermore would identify stocks listed on the New York Stock Exchange (NYSE) that had very low trading volumes. Such stocks were ideal targets because their prices could be moved significantly with relatively small amounts of capital, making them susceptible to manipulation.
2. Placing a Bet at the Bucket Shop: He would first place a trade at a bucket shop, taking a position (e.g., betting that a stock's price would rise or fall) based on the current market price of one of these thinly traded stocks.
3. Influencing the Real Market: Immediately after placing his bet with the bucket shop, Livermore would then execute actual trades on the NYSE for the very same stock. By buying or selling a sufficient quantity of these low-liquidity shares, he could cause the stock's price to move noticeably and quickly in the direction that favored his position at the bucket shop.
4. Collecting Profits: Once the price movement on the NYSE confirmed his favorable position, he would close out his trade at the bucket shop, collecting the substantial profits. Since the bucket shops paid out based on reported NYSE prices, and Livermore was directly influencing those prices, he could ensure his bet was a consistent winner.

This ingenious method worked because Livermore wasn't merely speculating on market movements; he was actively, though indirectly through the bucket shop's mechanism, causing the market to move in his favor. He exploited the low liquidity of specific stocks and the inherent vulnerability of the bucket shop model, which was built on the assumption that they could profit from customer losses without market interference.

Simplified Flow of Livermore's Manipulation