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.
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 Antitrust 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.
Common types of market manipulation include:
- Layering and spoofing are manipulative trading techniques that distort the perceived supply and demand of a financial instrument, misleading other market participants. In layering, a trader places multiple orders on one side of the market at various price levels, but these orders are not genuinely intended to be executed. Instead, they are used to create a false appearance of heavy buying or selling interest. Spoofing is a similar tactic, where a trader places a large order with the intention of canceling it before execution, aiming to move the market price in a desired direction. Once other market participants react to this artificial price movement, the spoofer can take advantage of the price change by trading against it. Both these techniques aim to mislead other traders, profiting off their reactions to deceptive signals. Recognizing the threats they pose to market integrity, regulators have made significant efforts to detect and penalize such manipulative behaviors.
- Marking the close: buying or selling a stock near the close of the day's trading in order to dominate or 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. 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.
- Painting the tape is a market manipulation technique wherein traders create an artificial trading activity in a financial instrument, usually stocks, to give the appearance of heightened interest or activity in that instrument. This deceptive practice can be accomplished through coordinated buying and selling among a group of colluding traders. The intention behind "painting the tape" is often to attract unsuspecting investors by presenting a misleading picture of demand or momentum. As these investors jump on the bandwagon, the manipulators can then sell their positions at artificially inflated prices. Such tactics are illegal and unethical, as they distort the true supply and demand dynamics of the market and can lead to significant losses for unsuspecting participants. Regulatory bodies like the U.S. Securities and Exchange Commission (SEC) actively monitor and penalize those found engaging in such activities.
- Cornering the market refers to a market manipulation strategy where an individual or a group acquires a significant enough portion of a particular commodity, stock, or other financial instrument, granting them a virtual monopoly. By controlling such a substantial amount of the supply, the manipulator can dictate terms, setting artificially high prices when selling or artificially low prices when buying. Once the market is "cornered," other traders may find themselves in a position where they have to transact with the manipulator, often at unfavorable terms. Such maneuvers are both unethical and illegal in many jurisdictions, as they undermine the fundamental principles of open and fair markets. Over history, attempts to corner markets have often resulted in dramatic financial collapses when the scheme unravels, leading to significant losses for the manipulators and disruption in the wider market. An example would be the Hunt brothers' attempt to corner the market in silver.
- Quote stuffing is a market manipulation technique prevalent in the era of high-frequency trading (HFT). It involves overwhelming a stock exchange with a large number of orders in a very short time frame, only to cancel them almost immediately. This flood of orders can cause latency in trading systems, making it challenging for other market participants to respond effectively. The intention behind quote stuffing is typically to create confusion or take advantage of slight discrepancies in trading speeds, allowing the manipulator to gain a fleeting yet potentially profitable edge over competitors. This type of behavior disrupts the normal functioning of the market and can lead to inefficiencies and mispricing. Recognizing its harmful impact, regulators in many jurisdictions have taken measures to deter quote stuffing, treating it as a form of market abuse.
- Pump and dump is a notorious market manipulation scheme where perpetrators artificially inflate, or "pump," the price of a stock or other financial instrument through misleading or false statements, often disseminated via social media, email campaigns, or fake news releases. These fraudulent promotions entice unsuspecting investors to purchase the security, driving its price up further. Once the price reaches an artificially high level, the manipulators "dump" their positions, selling off the stock at its peak. As they profit from their sales, the lack of genuine support for the inflated price becomes evident, causing the stock to plummet and leaving misled investors with substantial losses. While this scheme has existed for decades, the rise of internet communication has made it easier for manipulators to reach a broad audience quickly. Regulatory bodies, such as the U.S. Securities and Exchange Commission (SEC), actively monitor for and take action against pump and dump schemes due to their deceptive nature and the significant harm they can cause to retail investors.
- Contemporary forms of manipulation involving attempts to influence the prices reported on published indexes.
- In July 2010 - The Commodity Futures Trading Commission's Technology Advisory Committee began to examine the issue of wash trades and whether they should be allowed.
- market manipulation. Australian Securities Exchange.
- Manipulation of Futures Markets: Redefining the Offense. Fordam University.
- Keynote Address to the Cornerstone Research Conference on Market Manipulation in the Energy Markets by Commissioner Sharon Brown-Hruska. CFTC.
- Layering and Spoofing. MarketConductRules.com.
- Marking the close. MarketConductRules.com.
- MARKING THE CLOSE. Trading Technologies.
- DOMINATING THE CLOSE. Trading Technologies.
- CFTC Glossary: wash trading. CFTC.
- Wash Trades. LinkedIn.
- Painting the tape. MarketConductRules.com.
- Cornering the Market. Corporate Finance Institute.
- The Hunt Brothers Scheme. APMEX.com.
- Quote Stuffing.com. Marketconductrules.com.
- Pump and dump. MarketConductRules.com.
- Pump and dump. Investor.gov.
- Pump-and-dump scheme: What it is and how to avoid one. Bankrate.
- “Pump and dump” Schemes. U.S. Securities & Exchange Commission.
- CFTC Scrutinizes Wash Trades. Risk Waters.