The stock market is an indicator of the global economy. Influenced by supply and demand, politics, interest rates, natural disasters, and exchange rates, its mere existence means it’s fallible and open to exploitation.
With an equity market of just over 27.2 trillion U.S. dollars, the New York Stock Exchange is arguably the most influential, followed by the NASDAQ and the Shanghai Stock Exchange. And whilst there are strict rules and regulations that help keep fraud and manipulation at bay, market manipulation is rife. And given how difficult it is to detect, even the most astute investor needs to be aware of the various tactics employed.
What is Market Manipulation?
Market manipulation is a term that describes the artificial inflation of the price of goods or services for personal gain. In 2016 the EU recognized the growing need for regulation and introduced the EU Market Abuse Regulation which sets out the custodial punishments that can be implemented if a person or persons is found guilty of market manipulation.
In the UK for example, criminal sanctions include sentences of up to 10 years imprisonment and unlimited fines. Regardless of whether you’re new to investing or you’ve been around since the wolf of Wall Street days, here are some of the most common market manipulation tactics, and how to avoid them.
Common Market Manipulation Tactics
Market manipulation can occur in a number of ways, and being able to spot the signs of these underhand, unethical and often illegal practices is imperative for a long and successful trading career.
Fake news – The term fake news has made its way into the mainstream in recent years and market manipulation is rife with fake news stories. By spreading fake news stories about companies, stock market players are able to influence share prices. To overcome fake news tactics – or to play the players at their own game, you can wait for the stock to spike – or fall depending on the type of news out there, and then enter a trade in the opposite direction.
Pump and dump – Similar to fake news, pump and dump tend to work via mass email marketing. With stock promoters making glowing claims about a company in a bid to attract buyers. This then creates a spike in price in line with this new demand, and then the promoters sell – ‘dump’ the shares – resulting in a steep price drop. To avoid pump and dump schemes, you can also employ the ‘fading’ tactic. And wait for the initial rush to subside before making a move.