Legal Definitions - manipulation

In the context of financial markets, manipulation refers to the illegal practice of intentionally influencing the price of a security, such as a stock or bond, by creating a false or misleading appearance of genuine market activity or demand. This deceptive behavior distorts the true value of the security and can trick other investors into making decisions based on artificial market conditions, ultimately harming market integrity and fair pricing.

Here are some examples of how manipulation can occur:

• Pump and Dump Scheme: A group of individuals secretly buys a large quantity of shares in a low-priced, thinly traded company. They then aggressively promote the stock through false or exaggerated claims on social media, online forums, or email newsletters, creating a buzz and attracting unsuspecting investors. As more people buy into the hype, the stock price artificially inflates (the "pump"). Once the price reaches a peak, the original manipulators quickly sell off their shares for a significant profit (the "dump"), leaving other investors with drastically devalued stock.

  This illustrates manipulation because the manipulators created a false appearance of high demand and positive sentiment for the stock, not based on the company's actual performance, but solely to drive up the price for their own gain.

• Wash Trading: An individual or a group of traders simultaneously buys and sells the same security through different accounts they control, or colludes with another party to do so. These trades effectively cancel each other out, resulting in no change of beneficial ownership, but they create the illusion of significant trading volume and activity for that security. Other investors might see this high volume and mistakenly believe there is genuine market interest, prompting them to buy or sell.

  This demonstrates manipulation by fabricating the "appearance of active trading." The trades are not driven by genuine supply and demand but by an intent to mislead others about the security's liquidity and popularity.

• Spoofing: A trader places a large order to buy or sell a security with no intention of executing it. For example, they might place a massive "buy" order for a stock, making it appear as though there is strong demand and potentially driving up the price. Other traders might react to this perceived demand. Moments before the order could be filled, the original trader cancels the large order and then places a smaller, actual order on the opposite side (e.g., a "sell" order) at a more favorable price, profiting from the temporary price movement they induced.

  This is manipulation because the large, unfulfilled order creates a false signal of market interest or intent, misleading other participants about the true supply and demand dynamics of the security.