Understanding Market Manipulation

In 2020, JPMorgan Chase agreed to pay over $920 million for creating fake orders to ostensibly change the prices of securities. In 2022, eight financial influencers used their social media following to influence stock prices and were fined over $100 million. Both are cases of market manipulation. Anyone can end up on the losing end of a manipulated market, so it is important to understand the different types and their respective recognition signs. 

What is Market Manipulation?

Market manipulation is using influence to make it appear as though there is more or less demand than there actually is in the market. Manipulation is typically accomplished through the use of false information. This imbalance between perceived and actual demand can make investors act in ways that change the price of the underlying security for non-fundamental reasons. However, it can be hard for the U.S. Securities and Exchange Commission (SEC) and other regulators to trace back and prove. 

Is Market Manipulation Legal?

Market manipulation is illegal in almost every case. It undermines the integrity of financial markets and can lead to unfair advantages for certain market participants while causing others to lose money. Penalties for market manipulation have ranged from large fines to jail time. U.S. regulators take the issue seriously and are constantly trying to discover and eliminate market manipulation schemes. 

9 Types of Market Manipulation

Now that you have a basic understanding of market manipulation, let’s jump into some of the main types and examples. 

Currency Manipulation

Currency manipulation is something that the U.S. Treasury and other government agencies monitor to ensure that countries are not purposefully manipulating their currency to create a trade advantage. For example, a country could sell its currency to buy the U.S. dollar. This process would weaken its currency in relation to the USD, lowering export costs and giving it a trade advantage. The legality of this form of manipulation is difficult to define as it is an action that central banks take regularly and an international issue. 

The U.S. has a list of potential currency manipulators and looks at things such as the net purchases of currency, trade surplus and current account. The current countries on the list, as of December 2020, are India, Thailand, Taiwan, China, Japan, South Korea, Germany, Italy, Singapore and Malaysia.

Pump-and-Dump

A pump-and-dump scheme is when an individual or group of individuals buy a stock and then give misleading information that is positive to boost a stock's price, at which point they sell the stock for a gain. In the past, a single person with lots of influence on the stock market could have the power to create a pump-and-dump scenario. However, with the rise of the internet, micro-cap companies and cryptocurrency, it has become much easier for schemers to artificially inflate the price of securities. 

Perhaps the most famous pump-and-dump group was Stratton Oakmont, Jordan Belfort’s penny-stock brokerage. The group would artificially inflate the price of stocks they owned before selling them back to their own customers. Belfort eventually ended up serving jail time. His story was created into a memoir and movie, The Wolf of Wall Street.

Poop-and-Scoop

A poop-and-scoop is the opposite of a pump-and-dump. In this scheme, an individual or group of individuals would give misleading statements about a company that would negatively impact the stock’s price. The group would wait to buy the stock until after providing false and negative information to lower the price. This action would give them a better entry.

A famous example is that of James Alan Craig. Craig created several fake social media accounts of major equity research companies and posted fake headlines about companies to artificially send the price down. Craig was prosecuted by the SEC for market manipulation.

Short-and-Distort

A short-and-distort situation is similar but different from a poop-and-scoop. In this case, false information is still provided in hopes of lowering the price of a stock. However, instead of buying the stock after the false information has been released, they short-sell the stock before releasing the information and then close out their position at the bottom. 

A famous instance is that of Mark Jakob, who shorted Emulex stock. He worked for a new agency, where he went rogue and sent out a false statement about Emulex. He wrote that the CEO was stepping down and earnings missed. Shares dropped by over 60% before trading was halted. After the dust settled, Jakob was sentenced to 44 months in prison.

Order Spoofing

One of the more sophisticated forms of market manipulation, order spoofing involves creating visible orders in markets without the intention to follow through on the orders. This action artificially inflates the price. For example, a spoofer could place a large number of buy orders below the current price to make it appear as though there is demand in the market. This move would drive the price up. The spoofer would cancel the buy orders and place sell orders to take advantage of the higher price. 

JPMorgan was fined $920 million in 2020 for order spoofing. 

Fake News

Fake news is similar to pump-and-dumps and poop-and-scoops. Someone will put out false and misleading information to impact the markets and create a more favorable entry or exit for themselves. Fake news has become something to be increasingly aware of, as influencers can easily reach millions of people via social media. If you are going to invest based on something you see on social media or the internet, make sure that you do your research before deploying capital. 

Wash Trading

Wash trading is another sophisticated manipulation tactic similar to order spoofing. In this scenario, investors take both sides of the market; they buy and sell the same stock to increase its volume and manipulate the price. 

Wash trading is especially prominent in cryptocurrency as there is a lack of regulation. Owners of a cryptocurrency can wash trade the token to elevate the volume and make it seem legitimate. This move can attract investors and raise the price. 

Bear Raiding

Bear raiding is a form of market manipulation that involves collusion between many short sellers. It often occurs when investors find a company that is already vulnerable to short selling. They will then coordinate and short-sell the stock to send the price down. While short selling is entirely legal, collusion within the markets is illegal. 

Bill Ackman created a widely publicized bear raid of Herbalife in 2012. Ackman was outspoken against Herbalife, and the stock was down up to 20%. However, Ackman was not fined as he held his Herbalife shorts and did not make any money in the end. 

Churning

Similar to wash trading, churning involves trading high volumes of stocks to generate commissions. For example, wealth managers may be given agency over a client’s assets, allowing them to trade on behalf of the client. The wealth manager could abuse this trust and trade the client’s assets excessively to generate commissions. 

Churning can result in fines and suspensions or may force people out of the business. 

Market Manipulation is Illegal but Important to Understand

Market manipulation is the use of false information, whether through news or orders, to influence the price of a security. The rise of the internet and the resulting flow of information have magnified the issue. While the practice is largely illegal and has harsh consequences, it is important to understand so that you do not get caught in a scheme yourself. 

Frequently Asked Questions