What Is holding the market?
“Holding the market” is the deliberate practice of placing active or pending orders for a security in a market where the price is dropping in an attempt to “hold” the price of the security steady or to create an artificial floor in the security. This practice is outlawed in most instances, except when a broker or other party is mandated to keep the price of a security steady; this is only done in rare cases where there isn’t enough market depth to hold the price.
Holding the market may also refer to the practice of owning a broad market index such as the S&P 500 or Wilshire 5000 Total Market.
Key Takeaways
- “Holding the market” refers to an illegal trading practice that attempts to prop up the price of a security after negative news has been released that would otherwise cause a drop in its price.
- In certain instances, where regulation calls for market makers or specialists to add liquidity to markets with little depth, this practice may be allowed.
- Holding the market is hard to pull off these days because any one person would have to have very deep pockets to make a significant impact on a security’s price.
- The practice of owning and holding a broad market index is also referred to as holding the market.
Understanding Holding the Market
Not only is holding the market often a violation of securities regulations and exchange rules, but holding the market is hard to pull off these days because someone would have to have very deep pockets to make a significant impact on a security’s price. One factor that keeps the practice of holding the market from occurring more frequently is that it is rarely profitable and can often lead to severe losses if prices do not rebound.
However, if an investor with very deep pockets is considering a holding the market strategy, they should first try and understand why the price of the security is dropping.
Stocks that are declining in price often have recurring themes that, once identified, can help an investor decide if a holding the market strategy is the right course of action. These themes are typically related to one of three things:
- Market movement as a whole
- Industry action
- Firm-specific issues
Considerations for a Holding the Market Strategy
Most stocks react to market sentiment in predictable ways. Therefore, if negative news is released and the price of a stock remains steady—or even rises—especially with above-average trading volume, further investigation may be warranted. If a company’s fundamentals have not dramatically changed for the better, it could be the case that a group of individuals or firms is trying to artificially keep the price up using a series of bid orders, many of which may be spoofed (fake) orders that do not intend to trade.
Of course, not every anomalous or unexpected price movement is nefarious. There may be legitimate buy orders of large blocks placed by institutional investors for several reasonable and allowable purposes, such as rebalancing, hedging, or addition to a large portfolio.
Related Terms: market depth, bid orders, hedging, market index, market sentiment.
