What techniques are used for price manipulation in stock market?
In simple terms, a Stock Price Manipulation refers to the deliberate attempt that is made to artificially influence the market price of any stock. Here, the manipulator(s) try to create misleading data and indicators, in order to guide the stock prices: upwards, downwards or flat/range-bound.
The primary intention of Stock Markets around the world is to provide a fair and equal trading platform for all the market participants. Ideally, the price movement of the stock should primarily be governed by the supply and demand in the market. Everyone should be able to use their understanding and knowledge, to freely buy and sell financial securities.
But manipulation of stock prices can lead to an incorrect, or incomplete view of the actual market conditions. Moreover, the manipulation techniques can lead to an unfair advantage to some market participants. That is why, these activities are considered as Market Abuse techniques.
Scale of stock market price manipulation
An important element of manipulating stock prices is to move/trade significant quantities of shares. For Large Cap companies, the number of shares trading in the market is usually huge. So, it would need enormous amount of money to influence the prices of such stocks.
On the other hand, the Small Cap companies and Micro Cap companies have relatively fewer number of tradeable shares. A large trade can quickly move the market price for such shares. So, it becomes relatively easy to manipulate stock prices for these companies.
While most of the stock price manipulation activities are straight-out illegal, but several techniques fall in a legal grey area in some regions of the world. While in few cases, the activities might be allowed, but heavily regulated. So, it is also important to check the local laws and market regulations.
This page primarily focuses on how are stock prices manipulated. But the same methods can also be used for influencing prices of other financial assets like Bonds, Government Securities, Commodities, Foreign Exchange, Derivatives (Futures and Options), Cryptocurrencies etc.
Stock price manipulation techniques
The regulatory bodies and Market Infrastructure Institutions (MIIs) around the world try very hard to protect the investors from share price manipulation. But some negative market participants are successful in temporarily gaming the system through new ideas and tricks.
That is why, it is important for the investors to maintain a level of awareness, education and cautiousness. Some of the most common ways of price manipulation in share market have been mentioned below.
News and Rumors
Let us start with the most obvious, and the easiest method that is used for stock price manipulation. In this technique, the manipulators try to influence the price of a stock, by releasing price-sensitive information/rumors through news outlets, blogs, message boards, and other communication channels.
The news itself could be fake information, or incomplete information, or it could even be partially true. It does not really matter. If the news has the potential to impact the stock prices, it will spread like wildfire, and quickly move the market price of the share. By the time the clarifications or the details come out, some unfortunate investors might already get caught on the wrong side of this trade.
In general, when the news/rumors and other techniques are used to artificially inflate the price of the stock, it is known as Ramping. Whereas when these are used to reduce the price of the stock, it is called as Bashing.
The best defense against this manipulation technique, is that it can be easily spotted and verified. This is because in most regions, the companies are required to promptly disclose any price-sensitive information to the market participants. (Refer: How to check corporate announcements of your shares)
Stock Tips and Stock Recommendations
We all have probably been involved in some level of manipulation in stock prices, through tips and recommendations. Almost everybody seems to have a hot trading/stock tip, that could generate quick profits. This could range from friends and family, to financial gurus, bloggers, influencers, finfluencers etc.
It is impossible to stop this at a micro level or in personal conversations. But the real problem arises if an individual/entity has thousands of followers. The manipulator can use this technique to dole out tips to their followers, who might then buy/sell the shares from open market. When done in sufficient quantity, this trading can lead to a rapid movement in stock prices.
Giving tips and recommendations theoretically constitutes as giving investment advice. In most of the countries, there are strict rules and processes to become an authorized Investment Adviser, or Research Analyst, or equivalent. Unqualified people/entities are not allowed to provide trading advice in public forums.
So, the investors need to be extra cautious when confronted with such situations. Besides using tips and recommendations to directly move the prices, some manipulators also use these to build trust with their followers. This is a more elaborate type of scam, which has been explained in the below image.
Pump and Dump
This is a technique which requires the spread of euphoria, and a buying hysteria for a particular stock. It usually starts with a fraudster buying significant quantity of a particular stock (taking a Long Position). After this, the manipulator tries to increase the market price of the shares, by feeding positive news (real or fake), rumors, tips, recommendations, exaggerated forecasts etc.
By repeatedly doing these steps (known as Pump phase), the manipulator builds the stock as a great trading opportunity. Some other market participants get influenced, and start buying the stock. As more and more shares are purchased, the market price of the stock will move upwards.
This is when the manipulators start to sell their own holdings in the market (known as Dump phase). Once the manipulators have exited at the heightened valuations, they do not have to feed positive news to the market anymore.
So, the excitement around the stock slowly dies down, and the reality sets in. The fundamentals of the company do not match the stock price and expectations. So, the shares quickly drop in price, and many unfortunate traders end up purchasing shares at inflated values.
Poop and Scoop
This stock price manipulation method is the exact opposite of the Pump and Dump scheme mentioned above. While the ‘Pump and Dump’ focuses on artificially increasing the price of the stock, the Poop and Scoop scheme intends to artificially decrease the price.
The technique starts with the manipulator taking a Short Position in a particular stock. After that, the manipulator focuses on spreading negative news, rumors, poor forecasts etc. about the company.
When the negative outlook for the stock builds up, other market participants start to sell their shares. This causes the stock price to quickly go down. This is when the manipulators scoop in, and start buying the shares (closing their short position).
Once the manipulators have exited the position, they stop feeding the negative news to the market. The stock might now have become cheap, compared to the fundamentals of the company. So, the price of the stock usually starts increasing.
Lure and Squeeze
This technique of share price manipulation is more applicable in the stocks of Zombie Companies. These companies are slowly approaching towards defaulting on their debt, and also continuously erode the shareholder wealth.
The stock of these companies is usually in a gradual decline in the market. So, some traders see this as an opportunity to make a quick buck, by shorting/selling the shares of the company for short durations.
In the Lure and Squeeze scheme, the manipulators keep track of such shares, where the short positions have built up significantly. Some even spread news and rumors to maintain the negative outlook for the stock. As others are selling, the manipulators keep buying till the point the stock is oversold (known as the Lure phase).
When the time comes, the manipulators might suddenly leak positive rumor about a turnaround of the company like: debt restructuring, takeover by a bigger company, merger etc. This causes the short sellers to quickly cover their positions, and they now need to buy shares from the market (known as the Squeeze phase).
This frantic buying leads to the stock price suddenly jumping upwards, where the manipulators then sell their shares. The market regulators try to prevent this type of price manipulation, by preventing over-leveraging and over-speculation in securities, through concepts like Market Wide Position Limit (MWPL).
Spoofing
In the Spoofing technique, the manipulators attempt to give a false impression about the supply and demand of a financial security. Large orders are placed at a price which is very far away from the current market price. Usually, the manipulator does not intend to make any trade, and the orders are simply placed to project a higher number of orders for the stock.
Let us use a simple example of Spoofing, to explain how this stock price manipulation technique works. Suppose that a particular stock is trading at INR 706, and the current Order Book looks like the below table. Here, for example, a manipulator has placed the buy order B10, at INR 635.
| Order ID | Buy quantity | Buy Price | Sell Price | Sell quantity | Order ID |
| B1 | 200 | 705 | 706.5 | 40 | S1 |
| B2 | 50 | 704.5 | 707 | 250 | S2 |
| B3 | 170 | 704 | 709 | 30 | S3 |
| B4 | 75 | 703 | 709.5 | 90 | S4 |
| ….. | ….. | ….. | ….. | ….. | ….. |
| .. | .. | .. | .. | .. | .. |
| B10 | 96,000 | 635 | 755 | 800 | S10 |
If we compare the quantity of all the orders, it would become clear that the quantity defined in order B10 is very large. And the INR 635 price of the order is very far away from the current market price (INR 706). So, unless there is a massive price drop, there is a relatively low chance of this order getting executed.
The key point here is that the manipulator does not actually wish to purchase the shares in this example. Even if the prices start dropping, the manipulator might cancel the order.
To the other market participants, the total quantity in buy orders will appear to be far significant than the total quantity in sell orders. This will create a false impression that there is a huge demand for the security. Traders might even assume that there is a strong price support at INR 635. So, the traders might be tempted to buy the shares in this example.
Circular Trading / Wash Trades
Just like the Spoofing method for manipulation of stock prices, the Circular Trading technique tries to project a higher level of interest and trading in a particular stock. The main difference from Spoofing is that in case of Circular Trading, the trades do get executed on the Stock Exchange. But most of these are dummy trades between connected parties.
The fraud usually starts with the manipulator acquiring significant quantity of a particular stock. After that, multiple inter-connected fraudsters start to trade these stocks between themselves. These are also known as Circular Trades or Wash Trades.
Example: Manipulator A will place a sell order at INR 100. Manipulator B will buy it, and place a sell order at INR 100.5. Manipulator C will buy at this price, and place a sell order at INR 101. Manipulator A will then buy the shares back from Manipulator C. And so on.
This way, the stock price can be slowly moved in any direction. Moreover, since trades are executing on the Stock Exchange, other market participants might assume that large quantities of this stock are trading.
Due to the appearance of a heightened interest in the stock, other participants are tempted to enter trades for this stock. As prices move upwards, the manipulators slowly sell their shares to new traders entering the stock. After that, the manipulators suddenly stop their trades, and the stock prices quickly drop (often hitting continuous Circuit Breakers).
Cornering the market
This is perhaps the most elaborate method of price manipulation in financial markets. Stopping this becomes very complicated, because it might be legal in some parts of the world (up to a certain extent). As part of this technique, an entity (or group of entities) obtains a significant ownership of a particular financial security.
The acquired quantity is so large, that the entity can now effectively control the market prices of the financial security. This technique can be used for any type of security like Stocks, Bonds, Commodities, Forex etc.
Example: Suppose that a particular trading company has acquired significant quantities of cotton seed oil from the largest producers in the world. If this trader wants, it could temporarily store the oil with itself, and create an artificial shortage in the market. This could lead to an increase in the price of oil.
This particular technique of manipulating the prices is comparatively difficult to pull off. This is because it requires huge amounts of money, to first take a significant trading position in a financial security. To prevent artificial shortages or gluts, many countries impose strict restrictions on hoarding of certain commodities and other assets.
Moreover, most regulators of different countries require proper disclosures when a particular threshold of ownership is breached. For example, if a single entity has purchased more than 5% shares of a company, then the entity would need to disclose it to the public.
Cross-market and Cross-product manipulation
The Cross-Market Manipulation is a technique of indirectly controlling prices of a financial security in one market, by influencing the prices of the same security in a different market. For example, suppose that a particular stock is trading on 2 Stock Exchanges: 1 in India, and the other in Japan. Now, the manipulators could do Spoofing (explained above) in Japan, to show large selling pressure there. This could impact the prices of the same stock in India.
Similarly, the Cross-Product Manipulation is the technique of indirectly influencing prices of a financial security, by influencing the prices of another financial security. The most common example of this manipulation happens in the Derivatives market. For example, the manipulator buys/sells significant number of contracts of Futures and Options of a stock, in order to move the price of the actual underlying stock.
High Closing and Low Closing
In this method of stock market price manipulation, large quantities of a particular financial security are traded towards the end of the trading session. This will cause a sudden jump/drop in the market price, and influence the actual Closing Price of the stock.
There are different ways in which the Close Prices are calculated for securities around the world (Refer: What are different ways to calculate Closing Price?). But the common element is that the Close Price is largely dependent on the final few minutes of trading activity, at the end of the trading day.
The manipulator might buy large quantities of shares just few minutes before the market closes, to move the price upwards (known as High Close). Similarly, the manipulator could sell huge quantities just before the market closes, to decrease the price (known as Low Close).
There can be multiple reasons to influence the Close Price of the stock. For example, if a manipulator is holding a significant position in the Derivatives of a stock, then there will be a huge focus on the Closing Price of the stock, on the maturity date of the Derivatives.
Front Running / Tailgating
This is not exactly a direct stock price manipulation technique, but it is more of an attempt to unfairly make profits through an expected future price move.
Example: Suppose that an individual works in a large Mutual Fund. He/she gets the information that the Mutual Fund is planning to buy large quantities of a particular stock. He/she uses these details to take a personal trading position in the same stock, through his/her personal Trading Account.
This way, when the Mutual Fund starts buying large quantities, the price of the stock will move upwards. So, the individual will make a profit in his/her personal Trading Account. That is why, this method is also known as Front Running or Tailgating. The concept of Insider Trading is also very similar to this.
Depending on the size of the order placed by the dishonest individual(s), there might be some influence on the market price for the Mutual Fund in this example. Because the Mutual Fund has got an inflated price. But this falls more into the category of unfair trading practice, that is considered illegal in most countries.
Fake Brokers and Exchanges
In addition to a direct stock price manipulation technique, this is also perhaps the most common type of fraud that is rampant these days. The situation is even worse in case of unregulated trading like Cryptocurrency Trading, Opinion Trading, Dabba Trading etc.
As part of this scheme, the fraudsters create fake websites, portals, mobile apps, phone numbers, group chats, message boards etc. These mediums might appear as legitimate trading exchanges, Stock Brokers, Research Companies etc. But they are simply a sham, that is intended to fraudulently get money from the traders.
There are countless examples where fraudsters imitate famous Stock Brokers, and send stock tips and recommendations, by posing as the Broker. The uninformed traders then end up executing trades on the manipulated stocks.
On the other hand, there have been many instances of more sophisticated frauds as well, where the fraudster creates a fake online trading platform. The user opens an account on this website and deposits money with the fake Broker. The user then sees fictitious trading and fake profits on these manipulated trading platforms. But the actual deposited money is already gone.
That is why, it is very important for the individuals to be extra cautious about new, and unreliable Stock Brokers and platforms. The trading accounts should only be opened with registered and well-reputed Stock Brokers.
Disclaimer
- This page is for education purpose only
- Some information could be outdated / inaccurate
- Investors should always consult with certified advisors and experts before taking final decision
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