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Market manipulation

Market manipulation

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Encyclopedia
Market manipulation describes a deliberate attempt to interfere with the free and fair operation of the market and create artificial, false or misleading appearances with respect to the price of, or market for, a security
Security (finance)
A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...

, commodity
Commodity
In economics, a commodity is the generic term for any marketable item produced to satisfy wants or needs. Economic commodities comprise goods and services....

 or currency
Currency
In economics, currency refers to a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply...

. Market manipulation is prohibited in the United States under Section 9(a)(2) of the Securities Exchange Act of 1934
Securities Exchange Act of 1934
The Securities Exchange Act of 1934 , , codified at et seq., is a law governing the secondary trading of securities in the United States of America. It was a sweeping piece of legislation...

, and in Australia under Section s 1041A of the Corporations Act 2001
Corporations Act 2001
The Corporations Act 2001 , sometimes referred to just as the Corporations Act , is an act of the Commonwealth of Australia that sets out the laws dealing with business entities in Australia at federal and interstate level...

. The Act defines market manipulation as transactions which create an artificial price or maintain an artificial price for a tradeable security.

Examples

  • Pools: "Agreements, often written, among a group of traders to delegate authority to a single manager to trade in a specific stock for a specific period of time and then to share in the resulting profits or losses."
  • Churning: "When a trader places both buy and sell orders at about the same price. The increase in activity is intended to attract additional investors, and increase the price."
  • Runs: "When a group of traders create activity or rumors in order to drive the price of a security up." An example is the Guinness share-trading fraud
    Guinness share-trading fraud
    The Guinness share-trading fraud was a famous British business scandal of the 1980s. It involved an attempt to manipulate the stock market on a massive scale to inflate the price of Guinness shares and thereby assist a £2.7 billion take-over bid for the Scottish drinks company Distillers...

     of the 1980s. In the US, this activity is usually referred to as painting the tape. Runs may also occur when trader(s) are attempting to drive the price of a certain share down, although this is rare.
  • Ramping (the market): "Actions designed to artificially raise the market price of listed securities and to give the impression of voluminous trading, in order to make a quick profit."
  • Wash trade
    Wash trade
    A wash trade is an illegal form of stock manipulation in which an investor simultaneously sells and buys shares in order to artificially increase trading volume and thus the stock price....

    : "Selling and repurchasing the same or substantially the same security for the purpose of generating activity and increasing the price"
  • Bear raid
    Bear raid
    A bear raid is a type of stock market strategy, where a trader attempts to force down the price of a stock to cover a short position...

    : "Attempting to push the price of a stock down by heavy selling or short selling
    Short selling
    In finance, short selling is the practice of selling assets, usually securities, that have been borrowed from a third party with the intention of buying identical assets back at a later date to return to that third party...

    ."