Market Manipulation

Definition

Market Manipulation refers to the act of artificially inflating or deflating the price of a security or otherwise influencing the behavior of the market for personal gain. It involves strategies that may deceive or mislead investors, such as spreading false information or buying or selling securities to cause price changes. This practice is illegal and heavily penalized by market regulators.

Phonetic

The phonetic transcription of “Market Manipulation” is /ˈmɑːrkɪt məˌnɪpjəˈleɪʃən/.

Key Takeaways

1. Illegal Activity: Market manipulation refers to the deliberate attempt to interfere with the free and fair operation of the market and create artificial, false or misleading appearances with respect to the price of or market for a product, security, commodity or currency.
2. Types of Market Manipulation: Market manipulation can take several forms including pumping and dumping, spoofing, rumortrage, high closing, and bear raiding. Each involving different strategies to sway the market towards a favourable outcome for the manipulator.
3. Regulated by Authorities: Market manipulation activities are heavily regulated and penalized by securities authorities and other regulatory bodies such as the US Securities and Exchange Commission and the Financial Industry Regulatory Authority, aiming to maintain investor confidence and integrity of the markets.

Importance

Market Manipulation is a significant term within business and finance as it refers to the deliberate distortion of the free operation of the market, which in turn can undermine market integrity and deter investor confidence. This illegal practice involves strategies employed by manipulative traders or brokers intending to influence the supply, demand, or price of a particular security artificially for their benefit. Market manipulation could range from spreading false or misleading information to conducting complex transactions designed to alter the price movements of a security. Understanding market manipulation is critical because it can create significant risks for traders and investors, skew market conditions, and violate the basic principles of fair and transparent trade.

Explanation

Market manipulation refers to actions taken by individuals or entities with the intent to artificially control, distort or influence the normal functioning and operations of financial markets. This practice is typically employed to create false or misleading appearances with respect to the price of, or market for, a product, security, commodity or currency. It serves the purpose of providing a financial or economic advantage to the manipulator, often through unscrupulous means.Market manipulators endeavor to affect the supply, demand, or price of securities to create a sense of misleading market behavior and induce other investors into buying or selling securities, based on this falsified information, thereby causing significant financial harm. For the manipulator, the principal purpose is to reap profits or avoid losses, often in a short period. However, these practices are deemed illegal and unethical since they compromise market transparency, integrity, and efficiency. They can also lead to substantial financial losses for other market participants who act based on the manipulated market information.

Examples

1. Volkswagen Emissions Scandal (2015): Also known as “Dieselgate” , this is an instance of market manipulation in which Volkswagen installed software in their diesel engine vehicles to cheat emission tests. The rigged software manipulated the market by misrepresenting the vehicles’ emission levels and fuel efficiency, impacting the prices of their shares and products. 2. Enron Scandal (2001): Enron, an American energy company, manipulated the market by hiding large amounts of debt from their balance sheets. This gave the false impression of the company’s robust financial health, influencing share prices. When the truth was revealed, the company declared bankruptcy, affecting millions of shareholders. 3. The Libor Scandal (2012): Banks were accused of manipulating the London InterBank Offered Rate (LIBOR), a benchmark interest rate used globally. Certain banks falsely inflated or deflated their rates to profit from trades, misleading the market about their creditworthiness. This manipulation had a global impact given LIBOR’s use in determining interest rates for numerous financial products such as student loans, mortgages, and credit cards.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Pump and Dump
• Churning
• Cornering the Market
• Rigging Quotes
• Wash Trading

Sources for More Information

• Investopedia
• Wikipedia
• Corporate Finance Institute
• WallStreetMojo