Legal Definitions - market manipulation

Market manipulation refers to intentional actions taken by an individual or group to artificially influence the supply, demand, or price of a security, commodity, or currency. The primary goal is typically to create a false or misleading appearance of market activity or price movement, thereby inducing other investors to make trading decisions that benefit the manipulator. This practice is illegal because it undermines the fairness, transparency, and integrity of financial markets, preventing prices from being determined by genuine market forces.

Here are some examples illustrating market manipulation:

• "Pump and Dump" Scheme: A group of individuals secretly acquires a large number of shares in a small, relatively unknown company with a low stock price. They then launch an aggressive promotional campaign across social media, online forums, and through fake news articles, spreading exaggerated or entirely false information about the company's groundbreaking products or imminent lucrative contracts. This hype generates significant interest, causing many unsuspecting investors to buy the stock, which drives its price up dramatically. Once the price reaches a peak, the original group sells all their shares at a substantial profit, leaving the new investors with shares that quickly lose value as the artificial demand disappears and the truth emerges.

  This is market manipulation because the group intentionally created a false sense of demand and positive sentiment for the stock, artificially inflating its price. Their actions were designed to mislead other investors into buying, allowing the manipulators to profit at the expense of those they deceived.

• Spreading False Rumors (Bear Raid): A large investment fund takes a significant "short" position in a publicly traded technology company, meaning they will profit if the company's stock price falls. To ensure the price drops, the fund's analysts then leak fabricated negative information to influential financial news outlets and prominent bloggers, falsely claiming the company is facing severe regulatory investigations and that its flagship product has a critical, unfixable flaw. This causes widespread panic among investors, leading them to sell their shares rapidly, which drives down the stock price. The investment fund then "covers" its short position by buying back shares at a much lower price, making a substantial profit.

  This constitutes market manipulation because the investment fund deliberately spread false information to create an artificial downturn in the company's stock price. Their intent was to mislead the market and profit from the resulting decline, rather than allowing the price to be determined by genuine market forces based on accurate information.

• "Spoofing" in Commodity Futures: A high-frequency trading firm places a very large order to buy a particular commodity future (e.g., crude oil) on an electronic exchange, but with no actual intention of executing the trade. This massive "buy" order appears prominently on the market's order book, creating the misleading impression of strong demand for the commodity. Other legitimate traders, seeing this apparent demand, might place their own smaller buy orders, causing the price to tick up slightly. Just as the price moves, the high-frequency firm quickly cancels its large buy order and immediately places a smaller "sell" order at the slightly higher price, profiting from the tiny price increase they artificially induced. This process is repeated rapidly over and over.

  This is market manipulation because the trading firm is using "spoofing"—placing orders with no intent to execute them—to create a false and misleading appearance of market interest (demand in this case). This artificial signal influences other traders' decisions and temporarily shifts the price, allowing the manipulator to profit from these small, induced price movements.