Market manipulation

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Market manipulation is the deliberate attempt to interfere with the free and fair operation of a market and create false or misleading appearances regarding the price of, or market for, a security or commodity. This can be accomplished in a variety of ways, including by spreading misleading information to influence trading, or by using buy and sell orders deliberately to affect prices or turnover, in order to profit.[1]

In the futures and commodities markets, the CFTC defines a manipulative act as one that is inherently capable of causing an artificial price. It considers market manipulation to be an illegal restraint on trade, which is why manipulation cases have frequently been brought under the Sherman Act as well as the Commodity Exchange Act. Proof of manipulation requires a showing of monopoly power in the given market and intentional anticompetitive conduct.[2]

Common types of market manipulation include:

  • Marking the close: buying or selling a stock near the close of the day's trading in order to affect the closing price. This might be done to avoid margin calls (when the trader's position is not self-financed), to help stymie a takeover or rights issue, to support a flagging price or to affect the valuation of a fund manager’s portfolio at the end of a quarter (called "window dressing"). A common indicator is trading in small parcels of the security just before the market closes, which results in a higher closing price.
  • Wash trades and pre-arranged trading: A wash trade is a trade in which there is no real change in the ownership of the securities - the buyer is also the seller or is associated with the seller. It is done to give the appearance that purchases and sales have been made with no actual risk to the buyer or seller.[3] A pre-arranged trade involves two parties making a trade that will be reversed later, or under an arrangement that removes the risk of ownership from the buyer. "Pooling or churning" can involve wash sales or pre-arranged trades executed in order to give an impression of active trading in the stock. The Commodity Exchange Act prohibits wash trading.[4]
  • Classic forms of manipulation such as attempting to corner the market in a commodity. (An example would be the Hunt brothers' attempt to corner the market in silver.)
  • Contemporary forms of manipulation involving attempts to influence the prices reported on published indexes.

Regulatory moves


References

  1. market manipulation. Australian Securities Exchange.
  2. Keynote Address to the Cornerstone Research Conference on Market Manipulation in the Energy Markets by Commissioner Sharon Brown-Hruska. CFTC.
  3. CFTC Glossary: wash trading. CFTC.
  4. Wash Trades. LinkedIn.
  5. CFTC Scrutinizes Wash Trades. Risk Waters.