Market manipulation is an intentional effort to deceive and defraud investors by artificially affecting the supply or demand for a security and driving its price up or down. Those who orchestrate artificial price movements then profit from them at the expense of other investors.
The Securities Act of 1934, and the Commodities Exchange Act prohibit three types of market manipulation activities:
Spreading Rumors
Fraudsters can circulate rumors intended to inflate a stock price or drive it down, depending on whether they are interested in selling or buying.
Social media, chat rooms, email campaigns, and phony newsletters are all effective tools for spreading rumors and misinformation.
Fictitious Trading
Fictitious trades are sham transactions intended to give the appearance of activity or price movement. Entering a large number of buy or sell orders and then canceling them is one example of fictitious trading.
Price Manipulation
Price-manipulation schemes can use high volumes of trades to raise or depress prices. Fraudsters can also acquire inactive shell companies with registered shares.
How Stock Market Manipulation Works
While there are an infinite number of variations, there are a few common market-manipulation schemes:
Pump-and-Dump
Pump-and-dumps are the most common schemes to directly ensnare the average investor. They involve small companies, called "microcaps" or "penny stocks," with shares that are traded over the counter (OTC).
Fraudsters use microcaps for their schemes because there is usually very little public information available about the businesses, and it's easier for them to gain control of the stock.
When fraudsters have control of a company's stock, they begin a coordinated campaign to promote or "pump" it.
The campaign uses social media, emails, fake analyst reports, phony trades, and telemarketing to spread misinformation and create demand.
Once the stock price has been inflated, the fraudsters dump their shares. The campaign ends, the share price drops, and legitimate investors are left with worthless stock.
Wash Trades and Matched Orders
Wash trades and matched orders are forms of fictitious trading. Wash trades are simultaneous buy and sell orders for the same number of shares and share price by the same party. There is no change in ownership, and there is little or no financial risk to the trader.
Matched orders are prearranged trades between a buyer and a seller for a set number of shares at a set price.
Spoofing/Layering
Spoofing is another form of fictitious trading. It involves placing large numbers of buy or sell orders and cancelling them before they're executed.
In 2020, the Commodity Futures Trading Commission (CFTC) fined JP Morgan Chase $920 million for placing hundreds of thousands of commodity futures orders over eight years with the intent of canceling them before execution in order to influence prices.
Marking the Close
Marking the close is a high-volume trading scheme. Large numbers of trades are placed at the end of the day, artificially driving up the closing price of the stock.
In 2014, the SEC fined trading firm Athena Capital $1 million for systematically placing high volumes of trades in thousands of Nasdaq stocks in the last two seconds of the session over a six-month period.
Source: The Balance
Comments
{{DisplayName}}
{{ElapsedTime}}