Question of the week: What is Market Manipulation?

April 4 – What is Market Manipulation?

Market manipulation is the deliberate attempt to interfere with the free and fair operation of the market by artificially causing an increase or decrease to the price of a product, security, commodity or currency.

There are a number of different examples of market manipulation, but they all have the same goal – to change the price of securities to make money or prevent a loss. This manipulation is illegal and often leaves other investors holding the bag and losing most if not all of their investment. Here are a few examples of market manipulation:

Churning: A trader places both buy and sell orders for the same price. The theory is: increase activity in the shares and you will increase the price. Churning also refers to salespersons executing a large amount of unnecessary trades to generate commission, but that is not what we’re referring to when we’re talking about market manipulation.

Pump and Dump: One of the more popular market misconduct schemes, a pump and dump typically finds a cheap penny stock and promoters aggressively push the stock onto investors (the pump). As investors buy the stock, the price quickly rises. What the investors don’t know is that the scammers running the pump and dump already own large amounts of the stock. Once the price hits a certain level, the scammers sell their stock (the dump), making a tidy profit.  “The dump” also causes the stock to quickly decrease in value, hurting the investors they talked into buying the stock.

Runs: Also called “Painting the Tape” runs are when a group of traders create activity or rumors to drive up the price of a security. This can be accomplished quietly through word of mouth, or more publicly by using social media, blogs and investment forums.