Getting Acquainted with Market Manipulation Techniques
Market Manipulation can be defined as practices to distort the price of a financial asset, either single-handedly or by a group for selfish purposes. Although it is common for investors to have faith and confidence in the financial markets, there are some players that engage in activities that can easily deceive investors and manipulate the market. We will look at some of the commonly used market manipulation techniques in this article, how they are performed, and how to identify and safeguard yourself from them.
- The act of market manipulation includes trickery or other means with the aim of gaining personal interest through unfair asset policies.
- The mechanisms are many; some examples are wash trading, front running, layering and pump-and-dump.
- All these practices hurt regular traders, erode faith, and disorganize the fairness of the market.
- To avoid manipulation and its effects, one can remain alert, scrutinize the information carefully and trade on safe platforms.
What is Market Manipulation?
Market manipulation is taking unfair advantage in an asset by artificial inflation or deflation of demand or supply ,often through misuse of the ;natural price setting process. These practices only serve to the benefit of the manipulators while causing more damage to the investee or retail investors.
The word always gets mixed around with other words such as making a market, rigging a market and manipulating the price. These are not just differences in the vernacular as they indicate different and related concepts — some are perfectly legitimate and needed for market activity, but some are seedy and illegal.
Related Concepts
- Making the Markets
Market making is a process which is neither illegal nor immoral where people or organizations create a market by placing simultaneously a buy and a sell order for an asset, preventing the market from becoming too volatile. Unlike MAKING A MARKET, however, it increases the transparency of the markets and their efficiency.
- Rigging the Market
Market rigging includes conspiracies or coordinated attempts at market price collusion,减少竞争。
Market Manipulation and Price Manipulation remain illegal forms of market action, whereas Marketing and Market Making as defined above are legal – regardless of the ends pursued, why this is so remains to be seen.
- Manipulation of Asset Prices
Marketing and Market Making, as noted above, may be pursued to alter the price of an asset. Creating demand or supply of goods that are nonexistent is deemed market distortion. Although almost all of the actions indicated above are illegal and unethical marked market making, promotional pricing of commodities and central bank’s intervention have been marked as exceptions of the practice – to maintain stability in the market.
| Term | Definition |
|---|---|
| Market Manipulation | Broad actions that distort markets for unfair advantage. |
| Market Making | A legal process enhancing liquidity and stabilizing markets. |
| Market Rigging | Illegal collusion to control market conditions. |
| Price Manipulation | Targeted actions to artificially influence an asset’s price. |
Types of Manipulation in the Market
Washing Trading
This involves artificially creating an impression that there is an activity in the market by concurrently buying and selling the same asset. This artificially leads the investors to hope that there is excess demand or excess supply.
- How It Works:
- Orders are issued to purchase and also sell a particular asset at the same time.
- Such trades take place between accounts owned by the same person.
- The activity that has been concocted leads other people to conduct trades in the wrong direction.
- Warning Signs:
- Overtrading without relevant news from the market about the reason for such abnormal trading.
- Over trading or getting orders to buy and sell at different prices within a short time.
- Over trading or high level of activity without a corresponding change in prices.
Insider Trading
Ex-Front Running, uses awareness about enormous trades about to be done to make money.
- How It Work:
- A trader or an algorithm spots a large order yet to be filled.
- The buy order is before the large order, anticipating that the price will go up.
- They reverse the trade after the large order is placed that changes the price.
- Warning Signs:
- Price increases or decreases suddenly without apparent reasons.
- Trailing patterns that indicate the use of insider knowledge in making the trades.
P&D Schemes
Manipulators make false statements to artificially increase price of an asset after which they sell all the assets when the price is high and let others incur losses.
Signs of Suspicion:
- There was a price surge without any credible reason.
- Supporting social media messages have no verifiable sources.
Bum’s Rush
This strategy works in the opposite way. The representatives of an asset disseminate unverified information with respect to the asset but claim the information is negative to decrease the price of the asset. Once the price reaches the desired low level, they purchase it, only to sell it later after the price improves.
- Signs of Suspicion:
- Out of nowhere, uncontrolled negative information is thrown.
- Within a very short time the price of the commodity drops without any justification.
Order Layering
Order layering entails placing false buy or sell orders for a security with the intent to create an illusion of demand or pressure. These orders are placed and then rapidly silenced before execution refunds traders who misread the situation.
- Signs of Suspicion:
- Orders that are usually large and are instantly placed and retracted.
- Orders that are constantly being put on retainment for no apparent reason.
Chocking
Chocking of the market is more like order layering because it involves placing fake orders to mask the real intentions of the traders and has the fake market signals.
Cutting Bone
Cutting Bone is an instrument where people market an investment for personal benefit for example an asset that they would normally sell under the guise of an honest comment or advice.
- Signs of Suspicion:
- Social media influencers promoting an asset over and excessively and for which they have receive no payment or incentive.
- Adequately stretched a campaign on social media for no reason.
Chiseling Money out of Companies
Telling untruthful information, predatory pricing policy, and repurchasing their existing shares in stocks are common practices employed by large corporations to illicitly manipulate the markets.
These events are interesting: in 2018 Tesla CEO Elon Musk tweeted he would take the company private for $420 a share, such a bold statement had a temporary trust effect creating a spike in Tesla’s stock.
How to protect yourself against these types of ‘investment industry crimes’
The first step in these schemes is the understanding so as to protect your investments. Follow these tips to mitigate risks:
- Keep Yourself Updated: Research on exploitive practices of the market.
- Cross-Check: Make sure to find accurate Forex information.
- Invest in Several Areas: Invest low so as to maximize risk coverage.
- Emotionally Detached: Ensure all trades are data driven and not overhyped or feared.
- Platform Selection: Look for Exchanges that are safe and transparent in their dealings.
So, with adequate information and due vigilance, for instance not entirely relying on stop-loss orders, revolving around speculations, may assist minimization of undue risks of manipulation.
