What is Market Manipulation?

Instructor: Lori Forrest

Lori has taught college Finance, Operations and Business courses for over five years. She has a master's degree in both Accounting and Project Management.

In this lesson, we will discuss individuals who knowingly attempt to influence the market using false or misleading information about the price of securities or commodities. This is known as market manipulation.

Market Manipulation

Investors are impacted by the actions of all players within the stock market, whether legal or illegal. Market manipulation is an all too common occurrence, up by 37% in the last decade according to the Securities and Exchange Commission (SEC).

What Is Market Manipulation?

Market manipulation is intentional deception by stock brokers, traders, analyst or bankers in an attempt to misrepresent or alter market prices. Competition and profit are both at the heart of market manipulation. Sadly, there is a general consensus that Wall Street brokers are willing to do anything for a profit, even if it hurts other investors in the process. Market manipulation is illegal in most countries; in the United States, it's outlawed under the Securities Exchange Act of 1934.

Types of Market Manipulation

Market manipulation comes in many shapes and sizes. The following are a few examples of different types of market manipulation.

  • Churning - An attempt by a stock broker to increase activity in a client's account to boost commissions by buying and selling orders at the same price. This activity is intended to drive up the price and attract other investors.
  • Ramping - Creating activity or rumors intended to raise the price of a stock.
  • Wash trading - Generating activity to push up the stock price by selling and re-purchasing the same security.
  • Bear raiding - An attempt by a broker to short sell a security and drive the price down, allowing it to be bought back at a lower price and thus make a profit on the difference.
  • Cornering - When enough of a certain stock, commodity, or other asset is purchased in order gain control and establish the price for it.
  • Insider trading - This is perhaps the most well-known type of market manipulation; it refers to when insiders with confidential information about a company use that information to their benefit.

Impacts of Market Manipulation

One of the most notable examples of insider trading is the story of Enron Corporation and their founder, Kenneth Lay. Together with the company's CEO, Jeff Skilling, Lay manipulated the company accounting and stock market with activities like failing to report losses and concealing debt. They fooled analysts and investors alike, and investors reportedly lost over $70 billion. When it was discovered, thousands of employees at Enron not only lost their jobs, but also their life savings. It was so bad that Congress enacted the Sarbanes-Oxley Act to protect investors and increase the penalties for those who defraud investors.

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