Main Types of Market Manipulation

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Market manipulation is a common problem that you cannot completely eradicate. It affects markets like the forex, crypto, and stock markets. You can find several types of market manipulation techniques.

Stop loss hunting involves deliberately driving the market price to a level where stop-loss orders are triggered.

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What Is Market Manipulation?

Market manipulation is behavior made to deceive investors by artificially influencing security prices. It uses the information to mislead participants to result in manipulated increased profits. Market manipulation is illegal in most countries. Regulators also generally find it challenging to detect and prove.

Besides, you need not manipulate the same stock many times for it to be illegal. Exploiting the market once is enough for regulatory bodies to start a case. Authorities vigorously pursue the suspects because the manipulations can disrupt the capital flow.

This manipulation involves various techniques, such as rigging prices, quotes, or trades. It also consists in spreading misleading or false information. Another technique is partaking transaction series that make security seem more active.

Factors like earnings and announcements are legal in an asset's supply and demand. However, manipulation occurs when the information passed to traders is false. The intention to change price quotes also accompanies the false statements.

Market manipulation concerns assets like commodities, stocks, and currencies. It can sometimes affect other items, such as overnight interest rates. In such cases, you may make or lose millions of dollars. The outcome requires central banks and regulatory bodies to intervene.

Top 9 Market Manipulation Techniques

It is critical to know the different methods fraudsters use to lure investors. This knowledge acts as your shield in an ever-changing marketplace that may not be easy to track. Here are 9 market manipulation techniques to keep an eye on when trading:

Pump and Dump

This manipulation tries to increase a stock or security price via fake recommendations. The schemers base these recommendations on misleading, exaggerated, or false statements. Moreover, they already have an established position in a company’s stock. They promote the stock and sell their positions once the buzz leads to a higher share price.

Pump and dump schemes feature spam emails. The emails announce the incredible prospect of a currently unknown company. Victims load up on the said stock and invite others to buy it, bumping the price.

Poop and scoop refers to an inverse pump and dump scheme. It features making false, derogatory statements about a stock. The aim is for the price to fall and the manipulators to buy the stock cheaply.

Fake News

Fake news involves spreading false information about a company. The goal is to influence others into taking a specific action. Although this manipulation technique may appear harmless, it carries heavy fines and prison. It is also widespread among retail investors on message boards and chat rooms.

Fake news harms short-term and long-term traders. It can heavily affect the price, even when it is temporary.

Front Running

Front running, also called insider information, is among the most well-known market manipulations. It refers to making a financial move based on knowing something not privy to the public. You take action in hopes of profiting once the news becomes public information.

Its label as front running comes from the fact that you buy or sell an asset before a public announcement. Laws against insider information seek to create a fair marketplace for all participants. They prevent favoring traders with early access to information.

Spoofing

Spoofing occurs when you post large orders without the intention of executing them. The aim is to make it seem like plenty of sellers or buyers are in the market. This false information can influence other investors to sell or buy. The outcome is an unfair profit increase.

This technique uses an algorithm or bots to create a high number of trades. Afterward, the algorithm cancels them before the orders go through. This swift action allows spoofers to manipulate the market.

The manipulators depend on algorithms to put and cancel orders for them. They do not handle the process manually. This technique needs plenty of spoofed orders to move valuations. It is difficult to achieve via manual efforts. As a result, this technique is often prevalent in high-frequency trading (HFT).

Wash Trading

Wash traders buy and sell orders that counteract each other. The process does not result in material gains or losses. Wash trading involves making a stock appear more active than it is. This move seeks to lure other traders who notice the increased trade action.

Wash trading's goal is to distort volume figures. It also seeks to influence security prices and attract others into the market. It affects short-term investors like scalpers and day traders. They are vulnerable during the rapid buying and selling processes. Wash trading may have a more negligible effect on long-term investors since it does not last long.

Stock Bashing

Stock bashing aims to make the asset price fall via misinformation campaigns. The misleading news lowers confidence in a stock, resulting in its undervaluation. Sometimes, the manipulator may hold a position in the asset that benefits from a price fall.

A stock basher buys the stock at a lower rate after a successful market manipulation. This technique targets smaller company stocks than widely held ones. It is easier to manipulate the smaller targets.

Bear Raiding

This manipulation happens when short sellers attempt to push down the security price. A bear raider profits by short selling early. After that, the perpetrator spreads incorrect information in the market. Other people sell or short, causing the price to drop as the manipulator profits.

Bear raiding can occur over weeks or months. It has a more significant impact on longer-term traders. They are vulnerable as they wait for the stock to bounce back from the intense selling pressure. A failed bear raid can also lead to a short squeeze. It happens when the asset price rises. The short sellers repurchase stock to close their positions, creating a short squeeze.

Churning

Churning involves brokers or fund managers. It happens when the brokers boost trade activity to generate commissions for themselves. They trade on behalf of a client. However, they tailor those market actions for their profit rather than for the client. It violates the fiduciary duty of the broker or fund manager.

You can identify it by comparing commission costs and returns. Churning features increased commission costs with returns remaining stagnant or dropping. Most victims are long-term traders since they have funds under management.

Cornering the Market

Cornering the market occurs when an entity attempts to gain majority control of a stock or asset. The perpetrators seek to use this gain to manipulate that asset or commodity's price. They dictate what others must pay for it because they have much control.

It takes time to corner the market. Hence, this technique mainly affects longer-term traders. Additionally, meme stocks are often an outcome of cornering the market.

Market Manipulation Examples

Below are some market manipulation examples to help you better understand the deception. They guide you in identifying the telltale signs of fraud. This recognition allows you to avoid making rushed moves in the market.

Example 1

The Martha Stewart case is a famous manipulation example via insider information. Stewart partook in insider trading in 2001. The CEO of an enterprise she invested in advised friends and family to sell their shares. They sold their stakes in the experimental drug Erbitux. The US Food and Drug Administration (FDA) days later declared it would not approve.

After the announcement, the stock price fell. The court charged Martha for acting on the non-public tip. It ordered her to spend five months in prison. She also paid close to $200,000 for participating in the manipulation.

Example 2

The following market manipulation example is a hypothetical scenario showing the spoofing technique. For example, Mrs. Pete is a trader with 200,000 shares in Firm X stock and wishes to sell it. She utilizes an algorithm to place hundreds of buy orders for Firm X shares. This algorithm will also later cancel those orders before execution. As a result, Mrs. Pete spends no money.

The market reads the resulting order influx as increased demand for Firm X stock. As a result, the price rises, creating the perfect setting for selling. Mrs. Pete sells her 200,000 shares at an artificially inflated price. Thus, she manipulated the market to boost her profits.

Spoofing was a common manipulation technique during Bitcoin’s early days. It still occurs on less-regulated exchanges.

Example 3

Another example of market manipulation concerns false news. For instance, Mr. Y has shares in Company A and desires to increase stock prices. He secretly pays writers to generate hundreds of positive information. After that, he posts them via tweets, articles, and Facebook posts to market Company A.

The buzz from the false news drives up the stock price, leading Mr. Y to sell his shares at a profit. The stock prices fall once the hype stops. After the dump, the new investors experience losses.

Example 4

Large companies are typical market manipulators. They use various ways to reach their goals. False news is among the methods larger companies rely on for an advantage. They use it to make false claims about a product's quality and durability. False advertising seeks to attract consumers and investors.

For instance, a company sold baby powder milk for years globally. It claimed to be better than a mother’s milk. It took several years of court battles before the company admitted it made false claims.

Large businesses sometimes buy smaller enterprises that create similar products. They buy them to cut competition. Another technique is offering products at a lower cost to attract more consumers.

Example 5

Forex market manipulation happens when market makers force the price to a level with stop order clusters. They manipulate smaller retail traders into joining the market in the wrong direction. The manipulators finish their transaction once the price reaches their desired level. Typically, this shift occurs on a failed breakout of prior lows or highs.

The price reverses and rapidly drops once the supply hits the market. It leaves the small retail traders that followed the breakout at a loss.

Are Market Manipulations Illegal?

Market manipulations are illegal. Hence, the markets feature strict regulations to keep them at bay. Despite this, manipulation is part of the game. It is critical to understand how the market works to avoid the schemes.

Besides, it is impossible to control how the big companies play the game. The lack of absolute control ensures the continuing illegal practice.

Nonetheless, the Securities and Exchange Commission (SEC) and other regulators press charges against parties involved in market manipulation. They have federal securities laws that help determine lawbreakers and manipulation participants.

It can be challenging for authorities to detect market manipulation. More participants make it harder to recognize the subtle manipulation indicators. Hence, SEC and other regulators encourage whistleblowing. A whistleblower helps them know where to look and stop the manipulations early.

How to Avoid Market Manipulators

David Hawkins once stated, “You cannot do a good job unless you are keen on it yourself.” Keenness is the essential factor you need to avoid market manipulators. It enables you to notice strange shifts in the market. You can then use the alert to guard against false allurements. Below are three primary ways you can use to safeguard against market manipulators:

Do not respond to unexpected price pumps

It is easy and frequent for investors to fall for enticing yet unexpected price pumps. They frequently disappear and reappear to try to manipulate your actions. You can be a victim of spoofing, where you spot giant bids and offers during day trading.

Check sources of information

You want to verify many information sources before making your final trading decision. One way to confirm your references is via trusted news and analysis websites. They generally feature daily updates with reputable commentary. You can use them to understand the current market conditions better.

In addition, it is best to guard against insider information. It does not matter how close you are to the source. A good advice is to use and depend on available and verifiable public information.

It is common to find people falling for front running. They often follow insider information from friends, family, or close colleagues. It is advisable to avoid relying on an emotional connection to someone. You always want to base your trust and decision-making on reliable market information.

Invest according to your own rules

Investing according to your rules is a habit necessary to fight against manipulators. Your investment plan can aid you in avoiding falling for claims that appear too good to be true. You can avoid falling for techniques such as pumps and dumps or washing trading.

For instance, you may see significant volume increases with little price action. You can recognize this setting as wash trading characteristics and avoid making moves.

Impact of Market Manipulation

Market manipulation, a menacing spectre in the financial world, wreaks havoc far beyond individual investors. Its deceptive tendrils reach into the very integrity of the markets, casting shadows over financial institutions and even rippling into the overall economy. Understanding these impacts is crucial, not only for investors but for anyone concerned with the health and fairness of financial systems. Let's explore the multifaceted effects of market manipulation:

Effects on Investors

Investors are often caught in the web of manipulation. Misled by false information or artificial price movements, they may make choices that lead to financial loss. The fear of being deceived again can make them hesitant to invest, hindering their financial growth.

Effects on Market Integrity

Market integrity takes a hit when manipulators operate. Unfair advantages, misleading cues, and a lack of transparency create a market where honesty and fair play lose ground. This damages the market's reputation, making it less attractive to potential investors.

Effects on Financial Institutions

Financial institutions aren't immune to the trickery of market manipulation. From financial loss to reputational damage, these entities can suffer profoundly, leading to a loss of trust among clients and potential legal consequences.

Effects on the Overall Economy

The dark shadow of market manipulation doesn't stop at investors or financial institutions; it reaches the very core of the economy. By causing volatility, misdirecting capital flow, and eroding trust, manipulation can stymie economic growth, affect employment, and even impact a country's standing on the global stage.

How to Spot Market Manipulation?

Navigating the financial market requires vigilance and understanding, especially when it comes to spotting market manipulation. Tricky as it may be, there are specific signs and indicators that can hint at manipulative practices. Recognizing these signs is essential for protecting investments and maintaining the market's integrity. Here's what to look out for:

Unusual Volume and Price Movements

When there's a sudden spike or drop in trading volume or price without any corresponding news or events, it might be a sign of artificial influence. Monitoring the market for these unexplained changes requires constant attention, but it can shed light on potential manipulative behaviour.

Timing of Trades

Observing when trades happen can be revealing. Manipulators may prefer certain times, such as the opening or closing of the market, to execute their schemes. Regular patterns of trades at these specific times, especially in assets that aren't usually heavily traded, may be a red flag for manipulation.

Lack of Fundamental Justification

If a stock's price suddenly changes without alignment with its fundamental value or relevant news, it can signal manipulation. Investors must critically analyze price movements and ensure they are supported by tangible financial data or market events.

Unusual Order Sizes

Detecting manipulation may also involve noticing order sizes that deviate significantly from the norm. Large orders that are swiftly cancelled or small orders placed at strategic price points could be part of a scheme to mislead other market participants.

Stop-Loss Hunting

This practice involves deliberately driving the market price to a level where stop-loss orders are triggered. The manipulators benefit from forcing other investors to sell, often causing a significant price drop. To counter this, stay aware of common stop-loss levels, and consider using stop-limit orders rather than stop-market orders.

News Timing

Manipulators may time the release or even the withholding of market-sensitive information to suit their trading positions. They might delay a critical announcement to make gains or to avert losses, creating an artificial market environment. Being aware of how news correlates with market movements, especially in the absence of clear fundamental justification, may help in recognizing this manipulation.

Where Can I Trade?

You can trade with regulated brokers to avoid falling for market manipulation. They follow strict regulations that protect investors and traders. Additionally, they conduct honest and transparent operations to avoid misleading traders and clients.

Some regulated brokers you can work with include Oanda and Interactive broker. The former is the best for Forex trading, whereas the latter is the best for stock trading.

Oanda

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Oanda is the best option for Forex trading, boasting expertise of over two decades. It offers transparent pricing and innovative trading education. Hence, you can increase your understanding and confidence in the market. Besides, you can find various Contract for Differences (CFD) trading instruments. CDF instruments include forex, indices, commodities, cryptocurrencies, metals, and shares.

Oanda benefits include:

  • impressive research tools

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  • Efficient and user-friendly account opening

IC Markets

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IC markets are ideal for automated traders. They offer the largest trading platform globally by Forex volume. Besides, these markets have an order-matching engine in the New York trading hub. This data center processes more than 500,000 trades daily. Over two-thirds of all transactions originate from automated trading systems.

Advantages of IC markets are:

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Summary

"To live and learn" is a rule everyone follows in various aspects of life. You want to apply it wisely in trading by learning market manipulations to avoid them.

The different market manipulation techniques let you know the possible deceptions in trade. They also enable you to understand the telltale signs of artificial prompts. This alarm aids you in avoiding responding to manipulations.

Market manipulation is illegal. The information here explains the steps you can take to avoid being a victim trader. It also includes examples of regulated brokers for safe and transparent trading.

Using this knowledge, you can make prudent decisions about a broker and trading moves. You can trade in a legal setting while resisting market manipulators' allurements.

FAQs

Why does market manipulation occur?

Market manipulation occurs due to insufficient information among investors. It also happens because of asymmetric information in the market. Asymmetric information is a situation where one party has more material knowledge than the other in a transaction.

Is currency manipulation a kind of market manipulation?

Yes, currency manipulation is a market manipulation type. Yet, the perpetrator's identities give it a different class. The legal authorities such as sovereign governments and central banks are the manipulators.

How do risk controls help in market manipulation?

It is always advisable to consider risk controls when undertaking investments. The consideration helps prevent catastrophic losses from manipulation. Additionally, these strategies let you control your position size. You expose a small capital amount to risk on any single trade.

Why is market manipulation prevalent in smaller companies or markets?

Market regulators and participants tend to be more attentive to enterprises with large or medium market capitalization. This focus makes it easier to manipulate the stock prices of smaller companies.

Team that worked on the article

Rinat Gismatullin
Author and business expert

Rinat Gismatullin is an entrepreneur and a business expert with 9 years of experience in trading. He focuses on long-term investing, but also uses intraday trading. He is a private consultant on investing in digital assets and personal finance. Rinat holds two degrees in Economy and Linguistics.

Gismatullin has been an author at Traders Union since 2019. His focus is creation of detailed reviews of brokerage companies and cryptocurrency exchanges, as well as analytical and educational articles on finance.

Rinat’s motto: Always be open to new experiments. By overcoming the hardships you will reach the stars that open to those who seek.

Dr. BJ Johnson
Dr. BJ Johnson
Developmental English Editor

Dr. BJ Johnson is a PhD in English Language and an editor with over 15 years of experience. He earned his degree in English Language in the U.S and the UK. In 2020, Dr. Johnson joined the Traders Union team. Since then, he has created over 100 exclusive articles and edited over 300 articles of other authors.

The topics he covers include trading signals, cryptocurrencies, Forex brokers, stock brokers, expert advisors, binary options. He has also worked on the ratings of brokers and many other materials.

Dr. BJ Johnson’s motto: It always seems impossible until it’s done. You can do it.

Mirjan Hipolito
Cryptocurrency and stock expert

Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO). Mirjan is a cryptocurrency and stock trader. This deep understanding of the finance sector allows her to create informative and engaging content that helps readers easily navigate the complexities of the crypto world.