What Is Stock Market Manipulation?
The phrase “stock market manipulation” is used to refer to any action that distorts the fair and orderly exchange of securities, pricing, or capital. Fraud occurs when an action is taken with the intent to deceive another person, or when the action disrupts normal market conditions or the movement of capital.
State securities authorities and the Financial Industry Regulatory Authority (FINRA), the industry’s self-regulatory body, as well as the federal Securities and Exchange Commission (SEC), the government agency responsible for maintaining fair and orderly markets, take them very seriously.
According to the Securities and Exchange Commission, “stock market manipulation” occurs when “someone artificially impacts the supply or demand for an asset” (for example, causing stock prices to rise or fall dramatically).
Spreading incorrect or misleading information about a company, conducting a series of trades to make security appear more actively traded, or manipulating quote prices or trades to create the appearance of artificial demand or supply are all examples of stock market manipulation.
Other fundamental analysis factors, such as news announcements, earnings reports, and investor decision processes, can all affect the supply and demand for an asset at any time; however, stock market manipulation typically involves illegal means, such as spreading false information, attempting to influence price quotes, or posting fake orders.
Although stocks, currencies, and commodities are more commonly associated with stock market manipulation, other assets, such as overnight interest rates, can be manipulated for profit or loss on a massive scale. Central banks or other regulatory authorities may need to step in to prevent such manipulation.
As the price of an asset is affected by a number of factors, it can be difficult for authorities and regulators to discover stock market manipulation. It’s possible that not all of these factors are amenable to precise measurement. However, there are severe legal consequences for engaging in market manipulation and being caught.
Stock Market Manipulation Methods
The dissemination of incorrect information through internet channels that are commonly visited by investors is one of the strategies utilized in stock market manipulation techniques.
When combined with market signals that, on the surface, appear to be real, the deluge of false information that circulates on message boards can urge traders to carry out a particular move.
The following are the two primary methods of manipulating markets:
Pump and Dump
Manipulation of the market by “pump and dump” can be carried out using widespread email campaigns or even snail mail. Penny stock promoters are the most common perpetrators of the pump and dump manipulation, in which they flood the market with millions of positive, false reports about a firm in an effort to drive up its stock price.
The “pump” happens when ordinary investors in large numbers purchase shares, driving up both price and volume. Regular investors buy into a stock, and then the promoters sell their shares (“the dump”), sending the price tumbling.
Avoid investing in stocks that have suddenly skyrocketed in price to protect yourself against a possible pump and dump scheme. As we saw in the previous section, astute traders can profit from pumps and dumps by shorting the subsequent rally.
A lot of people have gotten spam emails touting the fantastic potential of a firm that nobody has heard of before (usually a penny stock). It’s possible that the senders of these emails have already bought a lot of the stock in question and are trying to encourage others to do the same.
It’s possible that the perpetrators of the pump-and-dump scheme have no intention of keeping their holdings in the stock for the long haul. All they want is for more people to buy the stock so that they can raise the price and make a profit.
In fact, the vast majority of individual investors who purchase the stock will see a loss in their first investment. When the buying slows and the original buyers decide to sell, the stock price drops back to its previous level, or even lower.
Although short-term traders are the most susceptible to the allure of a pump and dump scheme, even long-term investors can fall for the rosy predictions made about the company’s future.
Poop and Scoop
The approach known as “poop and scoop” is not employed nearly as frequently as the “pump and dump” method. In this scenario, the price of the stock of a company with a medium or big market capitalization is artificially lowered. After it has occurred, the manipulator will then purchase the undervalued shares in order to make a profit.
Poop and scoop are not as common as they once were since it is now much more difficult to artificially influence the prices of a reputable firm.
Currency manipulation is also a type of market manipulation but is considered a different class, given that it is executed by legal authorities such as central banks and sovereign governments. Currency manipulation isn’t effectively illegal but is frowned upon and considered to be malpractice by the World Trade Organization (WTO).
Trading partners may also choose to impose sanctions on currency manipulators. Under the floating exchange rate system, countries can deflate or inflate the value of their own currency as opposed to that of other countries.
They may devalue by selling government bonds or printing currency in order to make exports cheaper, and imports more expensive, thus addressing trade imbalances.
Currency manipulation is an accusation often levied in trade or exchange rate disputes, notably by the U.S. against trading partners who are sometimes alleged to set the exchange rate of their currency against the U.S. dollar artificially low to boost exports.
Governments and central banks can be accused of currency manipulation if they fix the exchange rate or seek to affect it less openly with market transactions from time to time.
Currency manipulation is a political term rather than a legal one because foreign exchange policies are set by sovereign countries. Currencies are fixed or allowed to float for a variety of internal and external motives, while currency manipulation claims are almost always the result of dissatisfaction with trade flows.
As a result, currency manipulation claims are almost always the result of dissatisfaction with trade flows. As a result, whether a currency manipulation is taking place or not is often a subjective judgment.
The U.S. Treasury makes a semiannual report to Congress on the macroeconomic and foreign exchange policies of major U.S. trading partners in accordance with the Omnibus Trade and Competitiveness Act of 1988. The report uses evaluation criteria spelled out in the Trade Facilitation and Trade Enforcement Act of 2015.
The December 2021 report concluded no major U.S. trading partner manipulated its currency’s exchange rate against the U.S. dollar to gain an unfair competitive advantage in international trade while singling out Vietnam and Taiwan for additional scrutiny.
Example of Currency Manipulation
For the first time in more than a decade, on August 5, 2019, the People’s Bank of China (PBOC) set the daily reference rate of the Chinese yuan higher than 7 yuan per dollar. This action resulted in a depreciation of the Chinese currency in relation to the dollar and made Chinese exports cheaper in dollar terms.
The rate was determined after it was announced by the administration of Donald Trump that new duties of 10% would be placed on imports from China worth $300 billion, and those tariffs entered into effect on September 1, 2019.
On the same day that the value of the yuan against the dollar surpassed 7, the Trump administration designated China as a currency manipulator. This classification was later removed a few months later. However, as of January 2022, the tariffs that were placed on Chinese goods were still in effect.
How To Prevent Stock Market Manipulation
If you are familiar with the ways in which particular markets in the trading industry are manipulated, you will be better able to avoid getting caught up in it.
You can always choose to trade in the short term with spread bets and CFDs if you are concerned about investing a huge amount of capital into long-term positions that may experience some type of stock market manipulation.
These kinds of derivative goods give you the ability to acquire and sell assets over a wide range of timeframes, including the immediate future as well as the far future. Trading using leverage does, however, come with a number of hazards, which you should be mindful of before opening any positions in the trade.
In addition, there are indicators that might help you determine if your target market is being manipulated. Such as:
- A bear raid is characterized by aggressive selling. In the event of a bear raid, it is possible to reduce losses by using stop-losses on long holdings. But these aren’t foolproof, and they don’t account for market gaps or slippage.
- Significant volume spikes with no discernible price movement are indicative of wash trading.
- Before relying on any information to make trading decisions, it’s important to verify its veracity through numerous sources. Our portal has regular updates to its dedicated news and analysis section, wherein insightful comments from our market analysts and reports from Reuters and Morningstar can be found side by side.
- It is common practice for day traders to identify spoofing when they observe unusually big bids and offers that repeatedly vanish and resurface. This is an effort to influence how you behave.
- You may protect yourself from the pump and dump schemes by coming up with your own plan and ignoring promises that sound too good to be true. If you want to safeguard your gains and reduce your exposure to risk, you should always have an exit strategy ready.
- It’s possible that you’re a victim of churning if your financial manager is increasing commissions while your returns remain flat or even decrease. Some dealers might opt to file a formal complaint.
- The law prohibits taking any action based on confidential information. Traders should know the risks associated with acting on non-public information that could significantly affect the value of a security.
Because less capital is required to manipulate the price of the security when it is a penny stock or a stock with little volume, price manipulation may give the appearance of being simpler with these types of stocks. Having stated that, stock market manipulation can happen at any time and in any place.
Final Words About Stock Market Manipulation
The process of artificially increasing or decreasing the value of a security on the market is referred to as “stock market manipulation,” and the word “stock market manipulation” is used to characterize the process.
Stock market manipulation in the financial sector, also known as price manipulation or stock manipulation, is done purposefully for the purpose of gaining a personal advantage. It refers to the act of manipulating the pricing of securities or the volume of trading on purpose.
It is against the law to purposefully attempt to manipulate the market. However, it can come in a variety of forms and can be found in the markets. Manipulative strategies are quite popular, and they often have a short-term focus while also being developed to leverage the impulsiveness of individual investors.
Knowledge of the many forms of manipulation and an awareness of the indicators that they present is the best defense an investor can have against the negative impacts that can be caused by manipulation. Investors that are level-headed, patient, and look at the market over the long term shouldn’t have to be concerned about gimmicks like these.
When it comes to any asset, widespread manipulation will inevitably lead to unstable and unjust market conditions. If prospective investors knew they would be taken advantage of, it is possible that they might think twice about putting their money where their mouth is and investing.
The reason behind manipulating the stock market is typically financial gain, though this is not always the case. When a more experienced and talented trader manipulates the price of a security, less experienced and retail traders almost always end up losing money as a result.
Gains for the manipulator come from retail traders who are either oblivious to the potential consequences or are motivated only by the desire to make a fast buck.
When you are trading, it is essential to take into consideration several risk management strategies.
Managing position size in such a way that just a little amount of capital is at risk on any particular trade is a strategy that some traders opt to employ in order to protect themselves from suffering large losses and to circumvent the danger of opening positions when markets are volatile.