This article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022). presents the concept of market manipulation.
Market manipulation refers to a deliberate attempt made by a person or a group of people to artificially inflate or deflate the price of stocks, commodities or currencies, and hamper the free and fair operations of the financial markets. It is a type of market abuse which is done to ensure personal profits and gains. The person doing market manipulation has the intent to influence the prices of the stocks, commodities or currencies in his favor.
Market manipulation is banned in almost all the developed financial markets around the globe including USA (under Section 9.a.2 of the Securities Exchange Act of 1934) and the European Union (under the Article 12 of Market Abuse Regulations on insider trading and market manipulation). With the rising complexity and trade volumes in the financial markets today, it is becoming increasingly difficult for market regulators to catch the culprits who practice market manipulation. However, the laws for market manipulation are very strict and often comes with severe repercussions which involves both civil as well as criminal liabilities for the person or group involved.
Forms of market manipulations
Market manipulation can take different forms. Some of the most common types of market manipulation activities involve:
The rise of technology and digital media in the recent years has spiked up the amount and reach of false or fake news that circulates in the market on a regular basis. The false news that is circulated to benefit certain investors or companies leads to market manipulation and comes with severe repercussions for the culprits.
Pump and dump
This is one of the most common form of market manipulation which involves inflating the prices of a lesser known company such as a microcap or a nanocap company by circulating misleading information and dumping the stocks once the prices of such companies has risen. The manipulator (or promoter) of such schemes has the intention to create artificial demand for such stocks and thereby generate quick profits.
This form of market manipulation involves an insider (a person related to the company or any of its employee with access to sensitive information) who uses non-public confidential information about a company, and generates profits or avoid losses by executing trades in the market based on such information.
In this form of market manipulation, a trader places large volume of buy or sell orders
without the intention of executing them. The orders are placed to attract the attention of other investors who would try to bet in the stock seeing the large order in the trading book. Such acts are usually carried out using high frequency algorithms and help the trader to manipulate the market in his favor.
In cornering, an investor or a group of investors buy significantly large volume of commodities or shares in order to sway the market in their favor and create a monopoly by controlling the prices and the supply for the asset.
In this form of market manipulation, a trader or a group of traders continuously buy and sell securities within themselves to hype up the trade volumes for such assets. This attracts the attention of other market participants and creates a false illusion about the asset and helps in increasing the demand.
The traders who enter long positions in the market, sometimes use stop loss orders to protect their position from a significant price decline (risk management). Bear raiding involves selling large quantities of stocks of a company thereby decreasing its stock price. This downward trend in the stock price usually triggers the stop loss orders of traders with long positions, and further decreases the stock price in mechanical way.
Examples of market manipulation
A formerly world-renowned telecommunications company came under the scanner of U.S. financial regulators in early 2000s. The company was charged for manipulating their financial books by showing high profits and thereby manipulating the stock prices for the company. The ‘Book Cooking’ fraud done by WorldCom amounted to $3.8 billion. After the charges were proved, the company had to bear severe repercussions and eventually filed for bankruptcy in July 2002.
JP Morgan Chase (2020)
Many investors filed a case against JP Morgan Chase for manipulating the prices for the silver futures and US Treasury markets, and harming the interests of honest investors by artificially lowering down the prices of these securities. The bank made huge profits over the years and recently agreed to such charges and paid a penalty amounting to $920 million to settle the investigation carried by market regulators and law enforcement authorities. The manipulation involved ‘spoofing’ carried out by employees at J.P. Morgan Chase, many of whom are now facing criminal proceedings.
Related posts on the SimTrade blog
▶ Akshit GUPTA Securities and Exchange Commission
▶ Akshit GUPTA Price fixing
▶ Akshit GUPTA Corner
About the author
Article written in December 2020 by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).