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Ineconomics andfinance,market manipulation occurs when someone intentionally alters the supply or demand of a security to influence its price. This can involve spreading misleading information, executing misleading trades, or manipulating quotes and prices.[1][2][3]
Market manipulation is prohibited in most countries, in particular, it is prohibited in theUnited States under Section 9(a)(2)[4] of theSecurities Exchange Act of 1934, in theEuropean Union under Article 12 of theMarket Abuse Regulation,[5] inAustralia under Section 1041A of theCorporations Act 2001, and inIsrael under Section 54(a) of the securities act of 1968. In the US, market manipulation is also prohibited forwholesale electricity markets under Section 222 of theFederal Power Act[6] and wholesalenatural gas markets under Section 4A of theNatural Gas Act.[7]
In India it is illegal under theSEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.[8]
Agreements, often written, among a group oftraders to delegate authority to a single manager to trade in a specificstock for a work period of time and then to share in the resulting profits or losses.[9] In Australia section 1041B prohibits pooling.[10]
When a group of traders create activity or rumours in order to drive the price of asecurity up. An example is theGuinness share-trading fraud of the 1980s. In the US, this activity is usually referred to aspainting the tape.[11]
Actions designed to artificially raise themarket price of listed securities and give the impression of voluminous trading in order to make a quick profit.[12]
In abear raid there is an attempt to push the price of a stock down by heavy selling orshort selling.[13]
Quote stuffing is made possible by high-frequencytrading programs that can execute market actions with incredible speed. However, high-frequency trading in and of itself is not illegal. The tactic involves using specialized, high-bandwidth hardware to quickly enter and withdraw large quantities of orders in an attempt to flood the market, thereby gaining an advantage over slower market participants.[14]
Cross-market manipulation occurs when a trader trades in one market for the purpose of manipulating the price of an asset in another market, capitalizing off the price-moving effects thus generated, instead of with the bona fide intent of profiting off the trade itself.[15]
In cornering the market, the manipulators buy a sufficiently large amount of an asset, often acommodity, so they can control the price creating in effect amonopoly. For example, the brothersNelson Bunker Hunt andWilliam Herbert Hunt attempted to corner the worldsilver markets in the late 1970s and early 1980s, at one stage holding the rights to more than half of the world's deliverable silver.[16] During the Hunts' accumulation of the precious metal, silver prices rose from $11 an ounce in September 1979 to nearly $50 an ounce in January 1980.[17] Silver prices ultimately collapsed to below $11 an ounce two months later,[17] much of the fall occurring on a single day now known asSilver Thursday, due to changes made to exchange rules regarding the purchase of commodities on margin.[18]
Pinging involves making small orders and then cancelling them with a computerized program in an effort to induce others in the marketplace to react to the "pings" and reveal their trading intentions to the party pinging.[19] Similarly, with spoofing, a computerized program submits or cancelling multiple bids or offers to manipulate the price of a security.
Similar to traditionalfront running, electronic front running uses knowledge of future orders to execute trades ahead of a future price. However, electronic front running utilizes financial technology to evaluate price changes and financial transactions for parties to execute advantageous trades.[20]
Journal of Financial Economics 51, 343-369.