Legal Definitions - rigging the market

Rigging the market refers to illegal activities designed to create a false impression of supply or demand for a security (such as a stock, bond, or commodity) to manipulate its price. The goal is often to trick other investors into buying or selling at artificial prices, allowing the manipulators to profit. This involves deceptive practices that interfere with the natural forces of supply and demand, preventing fair price discovery and undermining the integrity of financial markets.

Here are some examples illustrating how market rigging can occur:

• Example 1: A "Pump and Dump" Scheme

  Scenario: A group of individuals secretly acquires a large quantity of shares in a small, relatively unknown company whose stock trades at a very low price. They then launch an aggressive campaign using social media, online forums, and fake news articles to spread exaggerated or false positive information about the company's future prospects, such as claiming it has a breakthrough product or a major new contract. Simultaneously, they place numerous small buy orders to create the appearance of high trading volume and strong investor interest, further driving up the stock price.

  How it illustrates the term: This is a classic example of rigging the market because the group is *artificially inflating* the stock's price by creating a *false impression of demand* through misleading information and orchestrated buying activity. Their aim is to *entice other investors* to buy the stock at the inflated price. Once enough unsuspecting investors have bought into the hype, the original group "dumps" or sells all their shares at a significant profit, causing the stock price to collapse and leaving the new investors with substantial losses.

• Example 2: Spoofing in High-Frequency Trading

  Scenario: A high-frequency trader places a very large order to buy shares of a particular company, but with no genuine intention of actually purchasing them. This large "buy wall" appears on the market's order book, suggesting strong demand and potentially pushing the price up. Moments later, before the order can be executed, the trader cancels the large buy order and then quickly sells their existing shares at the slightly higher price that resulted from the temporary upward pressure caused by the fake demand.

  How it illustrates the term: This demonstrates rigging the market because the trader is *creating a false impression of demand* (the large, unfillable buy order) to *artificially influence the stock's price*. The intent is not to execute the large order, but to trick other market participants or automated trading systems into believing there's significant buying interest, allowing the manipulator to profit from the temporary price movement caused by this deception. This disrupts the natural price discovery process.