There are different ways investors/traders get dupped by the market manipulators by artificially influencing (inflating/deflating) the price, spreading rumors, creating artificial demand/supply.
Losing traders/investors often blame market manipulators. Rather than complaining about market manipulators/bluffers, it is better to upgrade the skill set of how the market works and thereby making quality investment decisions.
We can broadly classify market manipulation methodologies into two categories
1)Macro Manipulation: It is a traditional way of spoofing/luring traders by providing misleading information (fake news, rumors…etc) and making them engage in a particular security/commodity/currency.
2)Micro Manipulation: Micro manipulations are mostly done at the trading infrastructure level (High-frequency trading, Algorithmic facility) and it will be far difficult to figure out without a better surveillance mechanism. To understand Micro Manipulation one needs a good idea about market structure and trading infrastructure because most of the manipulations are done at bid-ask levels (order cancellations, order modifications…etc) and most of them rely on speed as an edge while micro manipulating the markets.
Macro Manipulation Techniques
1)Pump and Dump: Pump and dump is an illegal scheme by spreading false news about particular security or promoting the stock with a hot stock tip. It is mostly practiced in illiquid segments like smallcap or penny stocks where the fraudsters accumulate the penny/smallcap/microcap stocks in large quantity (pumping) and later spread fake news about the company or promote the stocks by providing hot tips (via Social Media, SMS, Email Newsletter, Whatsapp, Telegram) creating artificial demand thereby luring the unsophisticated retail investors and dump the stocks to them at higher prices
2)Pooling and Churning: When a trader places both buy and sell orders at about the same price and on top of that creating marketing campaigns to showcase artificial demand for a particular stock to lure investors. The increase in activity is intended to attract additional investors, and increase the price and thereby selling the stock at a higher price.
3)Ramping: when traders artificially raise or depress the market price of securities.
4)Painting the Tape: Group of Traders/Investors influence the price of a particular stock by trade among themselves to create an artificial illusion that high volume activity is happening and thereby attracting other traders/investors to come and drive momentum. One the Tape painting is done manipulators will sell their holdings to the immature investors at a higher price. These investors are left “holding the bag” once the manipulation ceases and the price of the stock declines steeply.
5)Wash Trading: Wash trading is one form of creating artificial demand by buying particular security in a larger quantity and instantly selling them thereby creating bigger volume spikes.
6)Bear Raiding: Group of Traders/investors get together and decided to drive a particular stock price down by short-selling and covering their position at lower prices.
7)Market Cornering: Market Cornering is acquiring a large market share of a particular stock/ commodity to obtain control over the price of the stock and later sell it at the higher prices. With the advent of futures trading, a corner may buy a large number of futures contracts on a commodity and then sell them at a profit after inflating the price.
8)Insider Trading: Insider trading is defined as malpractice wherein trade of a company’s securities is undertaken by people who by virtue of their work have access to the otherwise non-public information which can be crucial for making investment decisions.
When insiders, e.g. key employees or executives who have access to the price-sensitive information about the company, and attempts to generate profits by purchasing the company’s stocks or securities before the price-sensitive information is available to public, it is called insider trading and is highly discouraged by the Securities and Exchange Board of India to promote fair trading in the market for the benefit of the common investor.
9)Stock Bashing: A person in social media/News Media/Print Media repeatedly spreading misinformation about a particular stock to make the investors believe that they invested in a worthless company, reducing their confidence in holding the stock and make them sell those shares thereby driving the stock price down. In some cases, a stock basher may have a position in the asset which benefits from a fall in price.
10)Lure and Squeeze: This works with a company that is very distressed on fundamentals, with impossibly high debt and consistently high annual losses, but very few assets, making it look as if bankruptcy must be imminent. The stock price gradually falls as people new to the stock short it on the basis of the poor outlook for the company, until the number of shorted shares greatly exceeds the total number of shares that are not held by those aware of the lure and squeeze scheme (call them “people in the know”). In the meantime, people in the know increasingly purchase the stock as it drops to lower and lower prices. When the short interest has reached a maximum, the company announces it has made a deal with its creditors to settle its loans in exchange for shares of stock (or some similar kind of arrangement that leverages the stock price to benefit the company), knowing that those who have short positions will be squeezed as the price of the stock sky-rockets. Near its peak price, people in the know start to sell, and the price gradually falls back down again for the cycle to repeat.
11)High Closing: High closing is an attempt to manipulate the price of a security at the end of the trading day to ensure that closes higher than it should. Usually by putting in manipulative trades close to closing.
In the next article will look into how micro manipulation is done and what are the different styles of micro manipulation.