The financial markets are filled with opportunities to make a profit, but they also present opportunities for individuals to manipulate the market for personal gain. Market manipulation is an illegal activity that is punishable by law. It involves using deceitful and illegal means to distort the market and create an unfair advantage. In this article, we will explore the different types of financial manipulation and their effects.
Insider Trading Insider trading is one of the most common forms of market manipulation. It pertains to insiders who use company confidential information for their own personal gain and profit. Insider trading is illegal, and it violates the trust and confidence of the public in the fairness and integrity of the securities markets.
Cornering a Market Cornering a market also qualifies as manipulation. It is done by acquiring enough of a certain stock, commodity, or another asset so that one can gain control and establish the price for it. This practice is illegal since it eliminates competition and can harm the market.
Other Forms of Financial Manipulation
Churning When a trader works with other investors' money, they may execute an excessive number of trades in order to increase trade commissions. Even though the trader does not necessarily make the investor more money, they generate a lot of commission for themselves. This is called churning, and it is illegal.
Ramping An investor can ramp a market when they own a lot of money or a lot of a certain security. They can either sell their entire stock at once or buy a security with all their available capital. By doing this, they can cause prices to spike in a favorable direction. Ramping is illegal since it distorts the true value of the asset.
Wash Trading This is a method of market manipulation where a large investor would simultaneously place buy and sell orders on an asset. This registers as tremendous trading volume, which draws the attention of other investors. This form of market manipulation is illegal and can harm the market by creating false signals about the true demand and supply of the asset.
Bear Raiding Bear raiding is the trader's attempt to push down the price of a security in order to cover a short position. This is normally executed when the trader believes the price will not fall down in their favor, prompting them to manipulate the market. This practice is illegal since it creates false signals about the true value of the asset.
Rampproofing This is a mechanism used to ignore any public information that was published with the purpose of misleading the market. Publishers of this information tend to hold high stakes in the market. This practice is illegal since it can mislead investors and create false signals about the true value of the asset.
Pools These are illegal agreements between investors, where one of the pool investors is given full control of the pooled funds. This is illegal since that one investor normally holds a tremendous amount of power that could be used to manipulate the market. Pools distort the market and can harm the true value of the asset.
Pump and Dump These schemes are common among small investors. Communication channels would be established where a leading individual would signal a large group of investors to invest in one specific security. When they all work together, they can cause a single stock to rally significantly within seconds. Pump and dump schemes are illegal since they manipulate the market and harm the true value of the asset.
Cross-Market Manipulation This is a complex process that relates to how a trader would trade in one market with the objective of causing movement in a correlated market. This activity requires thorough knowledge of a market and substantial reserves of capital. Cross-market manipulation is illegal since it can harm the true value of the assets being manipulated.
Quote Stuffing This is done with high-frequency trading bots that have the capacity to execute immense trades in milliseconds.
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