Market manipulation is defined by the Securities and Exchange Commission (SEC) as “a practice in which a person or group buys or sells stocks, commodities or other investments with the aim of inflating their value or making a large profit at the expense of unsuspecting investors”. Market manipulation has been around since Wall Street’s infancy, but in recent years it has become increasingly difficult to detect, as traders employ increasingly sophisticated methods to influence the market and reap profits.
Market manipulation, also known as stock fraud, involves the artificially inflating or deflating of stock prices. Manipulators may buy large amounts of securities in order to drive the price of a security up and then sell those same securities after their value has been artificially inflated. The manipulation of prices is of particular concern to the SEC because it can create an overly optimistic view of a company’s performance and mislead investors into buying or selling stocks when it would not be in their own best interest.
One of the most common types of market manipulation is known as “pump and dump”. This is a scheme whereby stock promoters will buy and then aggressively promote stocks in order to drive up the prices and then sell the stocks for a tidy profit. The promoters, who are typically brokers, may use false or exaggerated statements about the stock in order to manipulate the market and create artificial demand for the stocks that they are promoting.
Another form of market manipulation is “short selling”. Short selling is when a person borrows stocks and then immediately sells them in the hopes of being able to buy them back at a lower price and make a profit. Manipulators may strategically “short” a stock in order to drive its price down, and then “cover” their position and reap the profits before the price goes back up.
Market manipulation is also increasingly taking place through the use of computerized automated trading platforms. High-frequency traders are able to make rapid-fire trades in order to create artificial movements in the market and generate profits. The practice, known as “spoofing”, is illegal under most securities laws, but is still very difficult to detect.
There are several steps that investors can take to protect themselves from market manipulation. The first is to become educated about the different types of manipulation and what to look for when investing in a stock. Investors should also be aware of the companies and individuals that may be engaging in manipulative activity and do their own research before investing. Additionally, investors should avoid placing too much trust in the advice of stockbrokers, as they may have conflicts of interest when it comes to deciding what stocks to buy or sell.
Computerization and technology have made it easier for traders to manipulate markets. But, with increased awareness and vigilance, investors can protect themselves from market manipulation and invest with confidence.
