Market Manipulation

Posted in Markets Compliance on May 10, 2024
Market Manipulation

Market manipulation is an act designed to deceive investors by controlling or artificially affecting the price of securities. Manipulation is illegal in most cases, but it can be difficult for regulators, and other authorities to detect, and prove. Market manipulation may involve factually false statements as well, but it always seeks to influence prices to mislead other market participants. Market manipulation is an intentional or willful act designed to deceive or defraud investors by controlling or artificially affecting the price of securities, or Intentional interference with the free forces of supply and demand. It is usually designed to drive a stock’s price up or down.

Market Manipulation

Market Manipulation

Market manipulation is harmful because it affects the integrity of the market place and the price is usually set by the unimpeded collective judgment of the buyers and sellers. It undermines fair, honest, and orderly markets. Investors stay out of the market if they perceive that it is not fair and is subject to manipulation.

The most important thing in market manipulation is to determine, who is making the money. If it can be determined who profited at the end of the day, that may be the prime suspect for the market manipulation. Market manipulations involve thinly traded securities of lesser-known start-ups. With a small trading volume, the price of the shares is easier to be affected and exposed to fraudulent claims. The manipulators circulate a piece of false news about the company to gain personal benefit.

Manipulators Or Insiders

Manipulators or insiders purchase the dormant entities, such as the shell companies, and merge them into a privately-held company with a genuine line of business. They find cooperative agents to make a market for the company’s shares. 

Trading begins in the shares of the newly formed company where the market manipulators rename the company and buy out any remaining shareholding, appoint new management and board of directors. Manipulators gain control of the company, without having to go through a more stringent IPO process.

Manipulation Methods

Manipulation of more liquid or widely traded securities is more difficult. It is much easier to manipulate the share price of a penny stock with a small typical daily trading volume than it is to manipulate the share price of a large-cap company with billions of dollars in daily turnover. Pump-and-dump is a type of market manipulation in which the price of a microcap stock is artificially inflated before being sold. The inverse poop-and-scoop scheme, in which false derogatory statements about a stock are made in order to buy it on the cheap, is less common. Then there’s the short-and-distort strategy, which is essentially a poop-and-scoop strategy used by short-sellers to profit.

Pump And Dumps 

Insiders or manipulators obtain the control of significant shares of the companies and start hyping the share to the public, to generate interest in the relevant share, and cause the price to rise. These activities are done using the internet, spam email. and faxes.

A company or promoter puts out a press release announcing some form of market-moving news that is not true or without a legitimate basis. For example, it is claimed that a significant transaction, a business deal is made, a patent, a new product, or a license for a certain technology is made. False financial news is released, such as record earnings, or sales.

Further, an independent analyst may publish an analysis regarding the company recommending the share as a “must buy” share. The analysis may be paid for by the insiders or manipulators.  

Final Thoughts

Market manipulation is the practice of controlling or artificially affecting the price of securities in order to deceive investors. In most cases, manipulation is illegal, but detecting and proving it can be difficult for regulators and other authorities. Market manipulation may also involve making false statements, but the goal is always to manipulate prices in order to deceive other market participants.