Wherever you are in your trading journey, you will have heard of the term 'market manipulation'. Whether you deem it as the murky side of trading or an embedded inevitability of the markets, there is seemingly no getting away from it. In this blog, we offer a brief introduction to market manipulation, what it can entail and how it works.
Market manipulation is everywhere
In the years since the financial crisis of 2008, there have been repeated discoveries of market manipulation across all sectors. The crisis itself was prompted by the manipulation of the subprime mortgage market by US banks and it brought increased scrutiny from regulators across all sectors. There are lots of market manipulation examples out there, but we’ve outlined a few well-known ones below.
Some big-name market manipulation examples
For instance, the word ‘LIBOR’ became mainstream news, with big banks having been found to have rigged inter-bank interest rates.
In one example from the FOREX market, in 2015 Citibank, JPMorgan Chase, Barclay and RBS pled guilty to rigging the U.S. dollar-to-euro exchange rate.
Commodities are not immune from market manipulation either - Goldman Sachs, Morgan Stanley and J.P. Morgan Chase were reprimanded for exploiting the control they have both over the online market as well as the physical warehouses for items like aluminium and oil industry assets.
And neither are securities: just think Enron, Nick Leeson at Barings Bank or the real “Wolf of Wall Street”, Jordan Belfort. Back in 2015, the U.S. Securities and Exchange Commission (SEC) issued a report saying that market manipulation was up 37%, despite the increased scrutiny.
Such market manipulation manoeuvres are often the work of professional traders who work in trading syndicates, investment banks and investment management firms, funds, or individual traders with huge capital. These players are responsible for over 80% of the money in the markets. They keep their activities secret.
Because of their huge purchasing power, they can drive prices down by selling off large positions in a given instrument, and then buying it back at a much lower price.
Such market manipulation is not a board-level policy, but is carried out by individuals within the company who, without the line management that has only latterly been put in place, act independently or in small groups. As journalist Gaby Lapera said in this The Motley Fool article, [They] ‘are in a high risk, high competition industry….looking for any kind of advantage they can possibly get.’
But what actually is market manipulation?
The US Securities and Exchange Commission describes market manipulation as the practice of ‘spreading false or misleading information about a company; improperly limiting the number of publicly available shares; or rigging quotes, prices or trades to create a false or deceptive picture of the demand for a security.’ (Source: Investor.gov)
Market manipulation techniques have names like ‘short and distort’, ‘pump and dump’, ‘churning’, ‘wash trading’, ‘cornering the market’ and, of course, ‘insider trading’.
But don’t be confused by the jargon. In practice, market manipulation examples can be as simple as someone creating a look-a-like social media presence that impersonates a genuine information source and then putting out fake news. Have a look at this stock market manipulation example, where charges were brought against a Scottish trader whose false tweets caused sharp drops in the stock prices of two companies: SEC Charges: False Tweets Sent Two Stocks Reeling in Market Manipulation.
Group psychology and the weaknesses of technical analysis are being used against the retail trader, who is persuaded to buy or sell because everyone else is doing it, or because there has been bad news for the company concerned.
So….what to do about market manipulation?
The wisest thing to do about market manipulation is to accept it as an intrinsic part of the structure of the markets, rather than getting frustrated. It’s just the nature of the game.
The key is education, especially for day traders who are more at risk because short-term gains in a stock can evaporate very quickly without an apparent reason. Everyone can benefit from thinking long term.
For more information on market manipulation, head to our dedicated website: MarketManipulation.org. On this site there are lots of great resources, information, videos and market manipulation examples to help you understand more about the practice. Especially this video: Market Manipulation: The Truth & How You Can Profit. It offers great insights into the realities of market manipulation.
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