Market Manipulation

The more I look at the share prices these days, the more I am convinced that there are some form of market manipulations out there. It might not be in a big, gigantic manipulation form, but they DO exist at some extend.

I found a nice reading yesterday from the NZ Ministry of Economic Development website regarding market manipulation.

Basically, there are of two main types of Market Manipulation Practices :

1. Disclosure based manipulation.

This occurs where a person disseminates false or misleading information which has the effect of misleading other participants about the value or trading volume of a security.

• An example is where a person disseminates unrealistic, unsubstantiated or incorrect data, projections or evaluations. The manipulator then uses the demand generated by the false information to sell their own shares. This is sometimes known as "hype and dump" or "pump and dump". Sound familiar?

2. Trade based manipulation.

This is the buying or selling of a security by a person which misleads or deceives other participants about the value or trading volume of that security.

Trade Based Manipulation category includes :

• Matched orders -- A matched order occurs when a person buys a security with a low turnover and subsequently places contemporaneous buy and sell orders for that security. These orders will be for substantially the same number of securities at substantially the same time and at substantially the same price. The aim of this is to convey an appearance of renewed interest in the security to attempt to induce others to buy the security. The intention is that enough new investors are attracted by the apparent increase in activity so that the price of the security rises. The manipulator is then able to sell the security and make a financial gain.

• Pools -- essentially the same type of practice as a matched order, but involves more than one person colluding to generate artificial market activity.

• Wash Sales --A wash sale involves a person, either directly or indirectly, being both the buyer and seller of securities in the same transaction, that is there is no actual change in ownership of the securities. The manipulator will undertake frequent trades hoping to attract other investors who note the increased turnover in the security. The manipulator aims to gain financially through creating a small price differential between the buy and sell rates of the security in question.

• Runs -- A run involves a person creating activity in a security by successively buying (or selling) that security. The intention is that the increased activity would, in the case where the person is buying, attract others to buy and push up the price. At that point, those organising the run would then attempt to sell out at a financial gain. This is sometimes known as "pumping and dumping."

• Corners -- A corner is where a person buys up a substantial volume of a security knowing that other market participants will be forced to buy from him at a higher price. An example of this would be where the other market participants hold short positions in the security which must be settled. A similar practice is the "abusive squeeze" where a person takes advantage of a shortage in an asset by controlling the demand side and creating artificial prices.

• Market Stabilisation -- This involves trading in a security at the time of a new issue in order to prevent a decline in the price of the security. This would normally involve issuers, underwriters or those participating in an offering of securities trading to avoid the failure of the offering.

• Marking the Close -- Marking the close is making a purchase or sale of a security near the close of the day's trading in an effort to alter the closing price of the security. This might be done to avoid margin calls (when the trader's position is not self-financed), to support a flagging price or to affect the valuation of a portfolio (called "window dressing"). A common indicator is trading in small parcels of the security just before the market closes.

• Parking and Warehousing -- These involve a person holding shares which are actually controlled by another person whose identity is not disclosed, sometimes through nominee or fictitious accounts.

• Computerised Program Trading -- This is a strategy mainly used by large institutional investors. It uses computer programs which determine the timing of transactions, for example if there is a discrepancy between the price of a futures index and the shares included in the index. It is likely to influence the price of securities, but may not be caught by market manipulation laws as it is not likely that an element of intent to induce trading or to mislead others could be proven. Trading programs themselves are not manipulative.

• Short Selling -- Another trading practice which is sometimes considered manipulative is short selling. Short selling is defined as the sale of securities where, at the time of sale, the seller does not own the securities. Short selling is used when a person considers that the price of a security will fall. A person will make a profit if he sells at the current price and purchases later at a lower price.

Extracted from the Ministry of Economic Development - New Zealand's website