What Is Manipulation of the Stock Market?

Feb 13, 2024 By Triston Martin

Telemarketing, social media, high-speed trading, and other tactics are used as market manipulation techniques to drive a stock price up or down purposely. The manipulators then exploit the price change to their advantage to profit.

Stock Market Manipulation: Definition and Examples

Market manipulation is an intentional attempt to deceive investors and cheat them out of their money by artificially inflating or deflating the supply or demand for a security. Those who generate fake price movements then benefit from them at the expense of other investors.

Making Use Of Social Media For Business

The U.S. Securities and Exchange Commission (SEC) has warned investors against short-term trading based on online discussion boards and social media. It has committed to protecting individual investors from "abusive or manipulative trading conduct."

In February, the lawyer Original author Berman declared that it would file a class action lawsuit for price manipulation against one of the major violators on the Reddit network.

The Securities Act of 1934 and the Commodities Exchange Act both prohibit three separate types of market manipulation:

Propagating Falsehoods

Fraudsters may propagate rumors designed to raise or lower a stock's price depending on whether they are interested in purchasing or selling. Social media, chat forums, email campaigns, and phony newsletters are useful tools for spreading rumors and misleading information.

Trading in the Mind

Phony trades or sham transactions are performed to give the appearance of activity or price movement. These trades don't involve a change in ownership, and the trader doesn't run any financial risk. One example of fictitious trading entails placing numerous buy or sell orders and removing them.

The financial markets significantly impact how well the economy is developing and functioning. In addition to deceiving investors, manipulation harms the economy by lowering confidence in the financial markets and the institutions that support and regulate them.

The Best Way to Influence the Stock Market

Although there are countless variations, the following are some common market manipulation strategies:

Pump-and-Dump

Pump-and-dump schemes are the most common scams that target typical investors directly. The terms "microcaps" or "penny stocks" refer to them since they include small companies with shares that are traded over the counter (OTC). Over-the-counter corporations are exempt from the strict listing requirements of an exchange like the NYSE or Nasdaq. Fraudsters utilize microcaps for their scams because it is easier for them to seize the shares and since there is often not much available in the way of public information about the companies.

Matched Ordering and Wash Services

Wash transactions and matching orders are examples of facewash trades are simultaneous orders by the same party to purchase and sell the same number of shares at the same price. The trader has little to no financial risk, and ownership does not change. Matching orders are transactions involving a buyer and a seller for a predetermined quantity of shares at a predetermined price.

Spoofing/Layering

Spoofing is another form of fraudulent trade. Numerous buy or sell orders must be placed and voided before execution. The Commodity Futures Trading Commission (CFTC) fined JP Morgan Chase $920 million in 2020 for putting hundreds of thousands of commodity futures orders over eight years to cancel before execution to influence prices.

Marking the conclusion

A high-volume trading approach is a close mark. Numerous transactions are made at the end of the trading day, artificially boosting the stock's closing price. In 2014, the Commission penalized investment firm Spartan Capital $millions of dollars because, during six months, it often executed significant deals in hundreds of Market equities in the final two seconds of the session.

Concerning Individual Investors

Sadly, investors are victimized by market manipulation strategies daily, leaving them with little avenues for recourse. Actively pursuing and stopping market manipulation fraud is the responsibility of several organizations, including the SEC Office of Market Intelligence, the CFTC, and the U.S. Department of Justice. Contact the SEC if you want to report market manipulation anonymously or think you are a victim of fraud. The strongest safeguards, however, are easy actions you may take before investing your money.

Artificially Messing With The Supply

Market manipulation is the deliberate and artificial raising or lowering of the supply or demand for a stock.

The market manipulators profit when other investors buy or sell securities whose price has changed.

For instance, rumors, phony trades, and price manipulation are all examples of market manipulation. Numerous well-known schemes can deceive the average investor, who frequently has no way of recovering their money.

Related Articles