Rotem helps companies identify and mitigate manipulation and reputation attacks in advance. CEO of dolos and ARX, a business consulting firm and VC.
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The stock market appears to be stuck in a bearish rut that has the potential to drag on for months or more. Even if markets recover in the coming financial quarters, the overarching bearish trend could weigh down stock prices for a year or possibly longer. Although it is often said that fortunes are made during bear marketsinvestors should also be aware of the potential for stock manipulation.
The Basics of Stock Manipulation
Stock manipulation occurs when individuals or institutions attempt to change the behavior of others with the underlying goal of making money from someone else’s misfortune. The sad truth is that market manipulators are often willing to artificially change or lie about prices, supply, demand and other factors that determine the value of financial securities.
Stock manipulators are not always powerful people or institutions. Anyone with an internet-connected device could potentially illegally manipulate the price of a stock simply by spreading false information about that company on an online bulletin board, chat room, social media, or even a video on YouTube.
The challenge lies not only in staying aware of the potential for such manipulation, but also in taking the precautions necessary to avoid such traps.
Examples of stock manipulation
Stock prices change based on supply, demand, economic trends, geopolitical events, and other stimuli. However, some price movements are artificial, meaning they are not the natural result of normal market factors such as supply and demand. If you notice that a stock has made significant upward or downward movement and there is no underlying reason for the rise/fall, there is a possibility that the stock has been illegally manipulated.
For example, a stock that moves as a result of spreading false information, placing false orders, or other attempts to change prices is likely a stock that has been manipulated. Do your due diligence, read the raw news, earnings reports and the latest data related to the stock, and you will have a better idea whether the price movement in question is justified or whether it is the result of manipulation.
When in doubt, stick to the mantra of doing nothing. You can always take a position in a stock that you are watching. However, if you were to take a large position after spotting potential stock manipulation, I’ve found that you’re more likely to lose a significant amount of that money, or possibly all of it.
Above all, keep in mind that it only takes one false piece of information in a tweet, online column, or even an internet forum like Reddit to drive a stock in a different direction.
Recognizing market manipulation as a certainty
While market manipulation is illegal, it does happen on a regular basis† There is simply too much illegal activity going on for the SEC to document and sanction in its entirety. Even if the SEC flagged down all possible forms of manipulation, there wouldn’t be enough time or manpower to analyze everything sufficiently.
If you recognize the fact that stock manipulation is quite common, you will be cautious when the market turns downward. And always shy away from effects that show signs of possible manipulation.
The subtlety of stock manipulation
There is a common misconception that market share manipulation can be easily identified and punished. The truth is that some market manipulation is quite subtle.
As an example, laundry trade is a subtle form of bear market manipulation that makes it appear that stocks are more active than they actually are. The purpose of wash trading is to lure victims to the stock as a result of increased trading volume, and then sell the stock at an increased price.
Wash trading targets traders who see a spike in daily volume and assume there must be a good reason for the increased activity. However, if the underlying cause of the increase in trading volume is due to wash trading, where buy and sell orders offset each other, it is likely nothing but a trap.
Even a single trader can increase the trading volume of a stock on a given day by repeatedly buying and selling shares between two separate trading accounts.
churning is another example of a subtle form of stock manipulation. Churning occurs when an asset manager, broker or other party incentivizes trading activity using a client’s money to incentivize commissions. If you notice that a broker, fund manager or asset manager is ramping up when the market is falling, he or she may do so in an effort to offset his or her personal investment losses with commissions arising from trades made on behalf of the client.
Just because there are market manipulators doesn’t mean you have to be a victim. To account for attempts to manipulate the market, pay close attention to the prices of securities that are rising or falling more than usual in the context of 50-day moving averages and make decisions accordingly. Investing in the stock market is always a risk, but it has to be a smart one.
The information provided here is not investment, tax or financial advice. You should consult a licensed professional for advice on your specific situation.
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