Market manipulation
The term refers to a kind of market abuse that involves conscious and artificial attempts to impact the price of a security. It is an illegal activity.
Some of the most popular techniques that may constitute market manipulation include:
- Expressing false information about a company
- Developing active trading scenarios that momentarily artificially inflate/deflate the price of a security
- Rigging quotes, prices, or trades to make the price of the security appear higher/lower than it actually is
Two of the most common market manipulation strategies are:
1. Pump-and-dump: this strategy includes artificially inflating the price of a security before selling it with an unrealistic profit. To increase the price of a security, an individual can simultaneously place an equal number of buy and sell orders for the same security through different brokers. As a result, these orders offset each other.
The execution of a large volume of orders creates an illusion of heightened interest in the security, which convinces investors of potential future price appreciation. Subsequently, they purchase the security, ultimately driving the actual stock price higher.
2. Poop-and-scoop: this strategy implies artificially deflating the price of a security before purchasing it, so as to acquire it for a discounted price. To decrease the price of a particular security, one can place numerous small orders at a price lower than the current market value.
This strategy creates the perception among investors that something is amiss with the company, leading them to sell their securities. Consequently, the selling pressure causes the stock price to further decline.
