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My friends from investment banks all told me the same story:
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From http://lcmarket.blogspot.com/, by KingShort
the following is pure fiction and I can make up anything I like it doesn't mean it's true, in fact you shouldn't assume anything anyone posts on a blog is necessary true. even news media, governments lie.

one of the first jobs I got after college was as a trader assistant on prop desk of a major investment bank (they call it principal trading as oppose to flow which deals with clients). Initially prior to working I had the most extreme ideas of conspiracies, inside trading, manipulation activities that happend in banks - especially with my disastrous market experience. also just like everyone else I was much fascinated with technical analysis at the time. my experience of working with real successful traders changed all that. I saw first hand how difficult prop trading was (less than 5% of traders in banks are prop) and regularly those who lost money were kicked out. they also made their decisions just like other normal humans - so there wasn't as such any top secrets or anything - just some that are better at what they do - I also saw to my surprise how TA was ridiculed and why. we had several strategies and similar to any place they have strict risk/funding limits. one of these strategies that can have high volume is long/short and what some might not realise is that although the volume can be staggeringly high the book is actually market neutral. this has become more common in recent years and Goldman are one of the leaders in this area.

so did I witness market manipulation in prop trading? no. but banks happen to have prop desks in various holes around flow trading although they should be clearly divided by 'chinese walls' and this is where it's more likely to happen. in other words, if one is going to manipulate the market, they'd be very unlikely to do that via their prop accounts. as you saw it can take a few bloggers to question the trades. I remember once FSA was visiting our offices and heard rumours that some 'prop' trader was being moved to hide away in the flow area one I had no knowledge of. so I suspect banks certainly do take part in activities that are somewhat shady. who authorises them or manages them I don't know.

Goldman is clearly very close to Washington and influence runs both ways. I wouldn't be surprised if they are taking part in some market stabalisation program in the short term with government support. but I think you have to dig deeper than just simple volume of a trading account. if that was something to worry about than you should take a look at what SAC capital or renaissance technologies get up to and no one knows what they actually do. you have to ask yourself, what sort of incredible strategy generates such consistancy and profitability that after all costs and fees lets Jim Simons take home $2.5Bil. this is one mans personal income from trading - it exceeds profits of most banks, corporates and hedge funds.

the world is a shady place in every corner you look. nothing is entirely fair. the best way to keep a secret is pretend you're some mathematical genius or write books on some market elasticity theory that don't make any sense (while clearly getting caught inside trading - you know who). I've come across those who even specifically invest in those that inside trade because "inside trading makes money" - call it market abuse or whatever, maximum penalty for this in some areas is $10k, and it never stops you relocting to Geneva and do the same. someone already mentioned you need to adjust if you expect manipulation. these are areas where game theory again can be useful when you analyse the benefit or "what's in it" for the manipulators, other traders and other agents in the market and think how they might react or behave.

xxxSWING