Market Manipulation: More Than An Insider Trading….
Spoofing, Churning, Cornering, Ramping, Wash Trading, Bear Raiding ….what else?
Market manipulation happens when someone tries to rig the supply and demand of a particular stock or any type of security. It’s a tactic or scam that could lead you into thinking that the market is going in one direction when it’s not. It is the act of intentionally trying to increase or decrease the value of a stock or influencing the behaviour of the market to do so and eventually taking profit from such activities.
While insider trading may be a famous example but there are many other illegal tactics that unscrupulous traders use to try and exploit the market for profit This can take many forms and of course all of which is illegal and can result in hefty fines and criminal prosecution if discovered.
Below is the latest case on how a big bank using one of the tactics (spoofing) to manipulate and rig the gold futures market.
On 14th Jan 2020:
JPMorgan’s trading surge helps fuel most profitable year ever <source: AmericanBanker.com>
“JPMorgan Chase & Co. just posted the best year for any U.S. bank in history.
The biggest U.S. bank generated $4.95 billion in trading revenue in the quarter, a 56% increase that was better than analysts expected. That marked the best fourth quarter for the firm’s trading desks in more than a decade $36.4 billion.”
On 2nd Oct 2020:
big market-manipulation scandals over the past decade have much in common: huge fines for the investment banks, criminal charges for the traders and an embarrassing paper trail revealing precisely what bank employees got up to. Interest-rate traders who manipulated the London Interbank Offered Rate () messaged each other with pleas to put their fixes in low. Foreign-exchange traders infamously called a chat room in which they discussed rigging exchange rates “the cartel”.
The case against JPMorgan Chase for manipulating precious-metals and Treasury markets has many of the usual features. On September 29th it admitted to wrongdoing about the actions of employees who, authorities claim, fraudulently rigged markets tens of thousands of times in 2008-16. The bank agreed to pay $920 mil to settle various probes by regulators and law enforcement; this includes a $436.4m fine, $311.7m in restitution to parties harmed by the practices and $172m in disgorgement (ie, paying back unlawfully earned profits). Some of the traders involved face criminal charges. If convicted, they are likely to spend time in jail.
Ex-Deutsche Bank gold traders found guilty in spoofing trial <sources:Businesstimes.com.sg>
<Video Credit: CK投資理財>
Spoofing is a disruptive algorithmic trading activity employed by traders to outpace other market participants and to manipulate markets. Spoofers feign interest in trading futures, stocks and other products in financial markets creating an illusion of the demand and supply of the traded asset. In an order-driven market, spoofers post a relatively large number of limit orders on one side of the limit order book to make other markets participants believe that there is pressure to sell (limit orders are posted on the offer side of the book) or to buy (limit orders are posted on the bid side of the book) the asset.
Spoofing may cause prices to change because the market interprets the one-sided pressure in the limit order book as a shift in the balance of the number of investors who wish to purchase or sell the asset, which causes prices to increase (more buyers than sellers) or prices to decline (more sellers than buyers) (spoofing in electronic markets). Spoofers bid or offer with intent to cancel before the orders are filled. The flurry of activity around the buy or sell orders is intended to attract other traders to induce a particular market reaction. Spoofing can be a factor in the rise and fall of the price of shares and can be very profitable to the spoofer who can time buying and selling based on this manipulation.
Under the 2010 Dodd-Frank Act spoofing is defined as "the illegal practice of bidding or offering with the intent to cancel before execution." Spoofing can be used with layering algorithms and front-running, activities which are also illegal.
Other Forms of market manipulation
Market manipulation can be found in some of the following forms:
- Churning. This is when traders place buy-and-sell orders at the same price, and this is usually meant to attract more investors and increase the price at the same time.
- Painting the tape. Here, a group of traders creates rumours or activities to increase the stock price. This is also known as ‘Ramping’ or ‘Runs.’
- Wash trading. The trade sells and re-purchases the same security or a substantial amount of the same security to generate more activity and increase the price as well.
- Bear raiding. This is where a trader attempts to reduce the stock price through either short or heavy selling.
- Cornering the market. This is the scenario where the trader purchases enough of a certain commodity, stock or another asset for him or her to control the supply and be able to determine the price for it.
- Insider trading. Here, insiders with critical and confidential information about a business capitalize on that knowledge to make a profit and avoid losses via buying and selling of stocks.
Market manipulation affects day traders and short-term investments the most, one need to be careful if you are doing options or futures trading.
Falling victim to market manipulation isn’t fun, it is also expensive. The best is to avoid trading these financial derivatives.
Quote Of The Day :
“Life seems to be
like a stock market...
Where relationships are traded/manipulated...
Can't judge when the value of a relationship will go high or low...!”