List of Stock Market Manipulations: It might sound a little weird for beginners, however, the stocks in the Indian markets too get manipulated, even though under the presence of big regulatory bodies like SEBI. Sometimes these stock market manipulations are noticeable, but most of the time they are not- it can even be difficult for the authorities and regulators to detect them. This is because there are a wide variety of factors that are affecting the prices of a stock on a daily basis and not all the impacts from these factors are quantifiable.
Today, we go through some of the popular ways of Stock Market Manipulations and widely used techniques manipulators use in order to get a better understanding. This would allow us as retail investors better understand and position ourselves.
Stock Market Manipulations – Ways in which the market is manipulated!
Market manipulation refers to the creation of false inflated/deflated misleading prices of security by interfering in the operations of the market. Market manipulation involves the intent to do so with the aim of making personal gains. If stock manipulation is caught then it is subject to prosecution.
There are multiple ways in which the stock prices are manipulated. Generally, it is easier to deflate stock prices in bearish markets and inflate them in bullish markets. Most of the market manipulation involves sending misleading signals in order to influence the retail investors. By creating positive perceptions manipulators influence retail investors to buy stocks increasing the price. The opposite happens when negative perceptions are created. The following are some of the methods of market manipulation.
1. Wash Trading
Here a single stock is sold and repurchased for the purpose of generating activity and increasing the price. The rapid buying and selling pump up the volume in the stock, attracting investors who are fooled by the increasing trades. This happens as the impression of increased activity influences uninformed traders.
2. Brokers and Pledged Shares
At times promoters pledge a part of their holding as collateral for raising loans which is a standard industry practice. At times as a last resort for the necessity of funds, the promoters are forced to pledge large chunks of their holdings – not a good sign for investors. For smaller companies, this funding is facilitated by brokers as their size makes it difficult for them to be deemed credible to raise funds through other sources. Lenders here generally offer 60-70% of the value of the shares pledged.
What manipulators do here is try and influence the markets to reduce the price which in turn reduces the total price of shares pledges. This now reduces the value of shares pledged and would require promoters to make up for lost collateral due to price loss. If news breaks out that the promoters are failing to do so retail investors begin to panic assuming the company is in for the worst and the share prices begin to fall. The markets react this way as in such cases the lender loan the money to the brokers and the company. And if the prices fall and the margins required are not met the lenders simply dump the shares in the market to ensure that they themselves do not make a loss. Manipulators recognize and take advantage of this fragile system.
Some experts, however, are not fully convinced that this is what is actually happening. They feel that there is a good chance that promoters and manipulators play a well-orchestrated game to reduce prices. This is possibly done to increase holdings at cheaper rates.
3. Pump and Dump
The pumping of stocks begins with manipulators buying huge chunks and then releasing positive announcements at times even along with the company in order to increase the share price. Uninformed retail investors here are lured-in to buy these stocks with the assumption of them being the next big thing. The high demand results in inflated prices marking the completion of the pumping stage.
Once the prices are inflated enough to make profits the bear cartels then start dumping the shares. This causes the prices to fall back to pre pumping levels resulting in losses among retail investors.
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4. Short and distort
This is a stock manipulation tactic employed by the bear cartels. Short selling is a completely legal practice selling borrowed stock in the hopes that the stock price will soon fall, allowing the short seller to buy it back at a profit. It is encouraged as authorities believe that it provides the markets with more information as often the short-sellers employ extensive research to uncover facts that support their suspicion that the target company is overvalued. Short selling also increases the market liquidity and provides investors with long positions an alternate source of income by lending shares. But unfortunately, bear cartels use this instrument differently.
Bear cartels target stocks that have been increasing in the recent past due to their positive results. They first artificially further pump up the price while taking short positions against the stock in the market. They then begin to spread negative information through public smear campaigns about the stock and offer poor predictions and targets. This eventually causes the price to fall where the cartels buy back the shares at lower rates earnings a profit by short selling. This is another version of the pump and dump but here the manipulators do not actually buy the stock. This scheme can only succeed if the manipulator here has credibility.
5. Spoofing the Tape
Spoofing also known as layering. Here the manipulator places orders in the market with no intention of actually buying. Other investors see the large orders waiting to be executed are led to believe that a huge investor is in the process of buying or sell at a certain price. Therefore, the uninformed retail investors to place their order at the same level to buy or sell.
Seconds before the market trades at the price of the large order, the order is pulled back from the market. But the retail investor, unfortunately, does not have the time to back out and their order is filled. This results in market drops and losses for anyone unfortunate enough to be tricked into buying.
6. Bear Raiding or Poop and Scoop
Bear raiding is when a large player forces share prices lower by placing large sell orders. The price plunges as stops are hit, adding to the selling. Once this happens, the manipulator buys the undervalued shares, thus making a profit. Although both are based on the same principle poop and scoop generally target medium or large-cap companies. It is rarer as it is harder to artificially affect the prices of a good company.
Although Illegal, financial market manipulation is rampant in today’s stock market and has always been so. Being retail investors with lower individual influence on the markets it is easy for investors o fall prey to these schemes. But understanding the stock market manipulations and other scamming methods allows us to come to the realization that the manipulations are part of the system.
Investors who realize this become not only better and in tune in identifying stocks that are manipulated but also find means to profit through them by adjusting their positions.
Aron, Bachelors in Commerce from Mangalore University, entered the world of Equity research to explore his interests in financial markets. Outside of work, you can catch him binging on a show, supporting RCB, and dreaming of visiting Kasol soon. He also believes that eating kid’s ice-cream is the best way to teach them taxes.